chapter 1a demand n supply new
TRANSCRIPT
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ENGINEERING
ECONOMICSBFC 4013
Demand & SupplyBy : En. Mohd Luthfi Ahmad Jeni
University Tun Hussein Onn Malaysia
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MARKETS DEFINED
MARKETS
POTENTIAL
SELLERS
POTENTIAL
BUYERS
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$5
4
3
2
1
DEMAND DEFINED
P QD10
20
35
55
80
A schedule or a curve that shows the
various amounts of a product that
consumers are willing and able to
purchase at each of a series of possible
prices.
DEFINITION OF DEMANDSum of goods and services available in the
market which are consumed and affordable by
the customers on every price level for specific
period of time.
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LAW OF DEMAND DEMAND LAW
The price for a product is
inversely proportional to
the quantity demand.
DDx = f (Px) ceterisparibus*
DDx = a bPx
* Demand of product is directly
determined by priceFigure 1A.1 Graph Demand for a Product
Price (Px)
Quantity Demand (DDx)
D
D
B
A
C
Expansion of
demand
Depletion of
demand
0
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LAW OF DEMAND
As Price Falls
Quantity Demanded Rises As Price Rises
Quantity Demanded Falls
An inverse relationship exists
between price and quantity
demanded
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Diminishing Marginal UtilityLAW OF DEMAND
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Diminishing Marginal UtilityLAW OF DEMAND
Income Effect
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Diminishing Marginal UtilityLAW OF DEMAND
Income Effect
Substitution Effect
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Diminishing Marginal Utility
Income Effect
Substitution Effect
LAW OF DEMAND
Demand Curve
Individual and MarketDemand
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GRAPHING DEMAND
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
PriceofCorn
QuantityofCorn
CORNPlot the Points
10 20 30 40 50 60 70 80
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55
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
PriceofCorn
QuantityofCorn
CORNPlot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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35
P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
PriceofCorn
QuantityofCorn
CORNPlot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
PriceofCorn
QuantityofCorn
CORNPlot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80
PriceofCorn
QuantityofCorn
CORNPlot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80D
PriceofCorn
QuantityofCorn
CORNConnect the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80D
PriceofCorn
QuantityofCorn
CORN
10 20 30 40 50 60 70 80
What if
DemandIncreases?
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1D
PriceofCorn
QuantityofCorn
CORN
10 20 30 40 50 60 70 80
D
Increase
inDemand
Increase
in Quantity
Demanded10
20
35
55
80
30
40
60
80
+
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80D
PriceofCorn
QuantityofCorn
CORN
10 20 30 40 50 60 70 80
What if
DemandDecreases?
GRAPHING DEMAND
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P
Qo
$5
4
3
2
1
P QD
$5
4
3
2
1
10
20
35
55
80D
PriceofCorn
QuantityofCorn
CORN
10 20 30 40 50 60 70 80
--
10
20
40
60
D
Decrease
in
Demand
Decrease
in Quantity
Demanded
GRAPHING DEMAND
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DETERMINANTS OF
DEMAND Tastes
Number of Buyers
Income Normal (Superior) & Inferior Goods
Prices of Related Goods
Substitutes & Complements Unrelated Goods
Expectations
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Demand Theory
PRICE DEMAND FLEXIBILITY
TYPES OF PRICE DEMANDFLEXIBILITY
Flexible Demand (Ep>1)
Non-flexible Demand (Ep
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Demand Theory
POINT DEMAND FLEXIBLE
EXAMPLE 1A
Determine the point
flexibility for each types ofdemand below:
0
op
p
QP
PQE
priceinc an eofPercenta e
uantityinc an eofPercenta eE
v((!
!
)(
)(
POINT
PRICE(RM) QUANTITY
A 3 5B 2 10
C 1 15 Figure 1A.4 Graph showing demand of differentflexiblibilty
Price (Px)
Quantityondemand (DDx)
D
D
B
A
C
0 5 10 15
1
2
3(P
(Q
1
15
15CE
110
25BE
35
35AE
p
p
p
!v!
!v!
!v!
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Demand Theory RELATIONSHIP BETWEEN PRICE CHANGE (P), TOTAL
REVENUE (TR) AND FLEXIBLE PRICE DEMAND (Ep)
TR = P x Q
TR : Total Revenue P : Price of Product
Q : Quantity of Product
P is inversely proportional with Q P ascending, Q descending P descending, Q ascending
TR depend on the flexible demand value for the products (Ep)
Effect on Price ascending Non-flexible Demand Ep 1 : P x Q = TR
Effect on Price descending Flexible Demand Ep >1 : P x Q = TR Non-flexible Demand Ep
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Demand Theory
EXAMPLE 2A RESULT When Ep>1
Price (P) ascending from RM3 toRM6 will decreases TR fromRM900 to RM0
Price (P) descending from RM6to RM3 will increases TR fromRM0 to RM900
When Ep
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Demand Theory
FLEXIBLE INCOME (EI)
Determine percentage ofchange in quantity demandbased on 1% change ofincome
Can be used to categorizeproducts:
LUXURY : EI > 1
NORMAL : 0 < EI < 1
NECESSITY : EI < 0
CROSS FLEXIBILITY(EXY)
Determine percentage of changein quantity demand based on 1%price change on other products.
Result: EXY > 1:
Ascending price on product Ywill increase the quantitydemand on product X ( X willreplace Y).
EXY < 1:
Ascending price on product Ywill decrease the quantity ofdemand for product X
(X&Y complimentary products)0o
I
I
Q
I
I
QE
incomeonc an eofPercenta e
uantityonc an eofPercenta eE
v(
(!
!
Ypr ctf rch gpricfrc t g
f rch gfrc t g
Y !
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Demand TheoryConclusion:
If product demand is flexible
(Ep>1), the seller need to lower the
price of product .
If product demand is non-flexible
(Ep
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SUPPLY / OFFER DEFINED
$1
2
3
4
5
P QS
CORN
- Supply is a schedule or a curve showing
the amounts of a product that producers are
willing and able to make available for saleat each of a series of possible prices.
- Supply is a schedule or a curve showing
the amounts of a product that producers are
willing and able to make available for saleat each of a series of possible prices.
5
20
35
50
60
- Quantity of product and services affordable by
the producer for sale in the market for every price
range for specific period of time.
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LAW OF SUPPLY / OFFER
As Price RisesQuantity Supplied Rises
As Price Falls
Quantity Supplied Falls
A direct relationship exists between price and
quantity supplied
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Supply / Offer Theory
OFFER LAW
Price and quantity of product offered : POSITIVERELATIONSHIP (+)
When price ascends, producer will increases the quantity ofoffer to
achieve high profit.
When price descends, the producer will decreases the quantity
of offer, to avoid lost.
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5
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNPlot the Points
GRAPHING SUPPLY
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P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNPlot the Points
GRAPHING SUPPLY
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35
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNPlot the Points
GRAPHING SUPPLY
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P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNPlot the Points
GRAPHING SUPPLY
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P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNPlot the Points
GRAPHING SUPPLY
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SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORN
Connect the Points
GRAPHING SUPPLY
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SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORN
What if
Supply
Increases?
GRAPHING SUPPLY
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SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
PriceofCorn
QuantityofCorn
$5
4
3
2
1
60
50
35
20
5
P QS
CORN
80
70
60
45
30
SIncrease
in
Supply
Increase
in Quantity
Supplied
GRAPHING SUPPLY
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SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORN
What if
Supply
Decreases?
GRAPHING SUPPLY
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SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$5
4
3
2
1
60
50
35
20
5
P QS
PriceofCorn
QuantityofCorn
CORNS
45
30
20
0
--
Decrease
in
Supply
Decrease
in QuantitySupplied
GRAPHING SUPPLY
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Supply / Offer Theory
Figure 1A.6 Offer Graph by seller
MarketPrice
Quantityofproductoffered
S
SB
A
C
0 20 30 40
1
2
3
4
Expansion in
offerDepletion in
offer
Figure 1A.7 Change in offer for similar price
MarketPrice
Quantityofproductoffered
S2
S
0 Q2 Q Q1
P
Expansion in
offer
Depletion in
offer
S2 S1
S S1
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Supply / Offer Theory
FLEXIBLE OFFER flexible
TYPES OF FLEXIBLE PRICE
OFFER
Flexible Demand (ES>1)
Non-flexible demand (ES
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Offer Theory
KEANJALAN PENAWARAN
Fi ure 1A.9 Offer flexible rap
MarketPrice
Quantityofproductsoffered
S1
0 Q0
Q1
Q2
P
S0
S2
C an e Factors onFlexible Price Offer (ES)
1. Time Factor
2. C aracteristic of product
3. Manufacturin factor used
- Current term
- S ort term
- Lon term
- Fixed factor
- Variable factor
P1
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Supply / Offer Theory
Fi ure 1A.8
Price of
ot er productClimate
ExpectedPrice
Sum of
Producers
Tec nolo y
Tax
and Subsidy
Factor Cost
Of Production
Factors on Decision of Offer
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DETERMINANTS OF
SUPPLY Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers
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DETERMINANTS OF
SUPPLY Resource Prices
Technology
Taxes & Subsidies
Prices of Other Goods
Price Expectations
Number of Sellers
Combining
with
Demand
MARKET DEMAND &
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MARKET DEMAND &
SUPPLY
$5
4
3
2
1
10
20
35
55
80
$5
4
3
2
1
60
50
35
20
5
200
B
U
Y
E
R
S
P QD
BUSHELS
OF CORNMARKET
DEMAND
2,000
4,000
7,000
11,000
16,000
200
S
E
L
L
E
R
S
12,000
10,000
7,000
4,000
1,000
P QS
BUSHELS
OF CORNMARKET
SUPPLY
EQUILIBRIUM
x x
MARKET DEMAND &
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7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000D
P Q
S
PriceofCorn
QuantityofCorn
CORN
MARKET
CORN
MARKET
Market
ClearingEquilibrium
MARKET DEMAND &
SUPPLY
MARKET DEMAND &
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7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000D
P Q
S
PriceofCorn
QuantityofCorn
CORN
MARKET
CORN
MARKETSurplusAt a $4 price
more is being
supplied than
demanded
MARKET DEMAND &
SUPPLY
MARKET DEMAND &
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117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000D
P Q
S
PriceofCorn
QuantityofCorn
CORN
MARKET
CORN
MARKET
At a $2 price
more is beingdemanded than
supplied
Shortage
MARKET DEMAND &
SUPPLY
MARKET DEMAND &
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117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD
$5
4
3
2
1
2,000
4,000
7,000
11,000
16,000
$5
4
3
2
1
12,000
10,000
7,000
4,000
1,000D
P Q
S
PriceofCorn
QuantityofCorn
CORN
MARKET
CORN
MARKET
Shortage
MARKET DEMAND &
SUPPLY
Surplus
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Market Equilibrium
MARKET ECONOMY
Demand Vs Offer of product
Demand : USER
Offer : PRODUCER
MARKET
A place where buyer and seller interact
between one another.
MARKET EQUILIBRIUM
Quantity offered by the producer
at a particular price = quantity
demanded by the buyer at that
price.
Fi ure 1A.10 Example of relations ip between
price & uantity of product X
Price
Quantity
S
0 200 600 1000
30
D
DS
E
10
50
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Market Equilibrium DEMAND FORMULA
OFFER FORMULA
FOR EQUILIBRIUM TO
OCCUR
QD = a bP
QS = f + P
QD = Qsor
a bP = f + P
Note
QD : quantity demand
QS : quantity offer@supplyP : target pricea dan f : constantsb : demand gradientg : offer gradient
Facts
Gradient of demand (b) : ( - )Gradient of offer (g) : ( + )
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E1E2
Change of Point of Equilibrium
Fi ure 1A.12 Offer C an e Demand Fix
Price
Quantity
0 Q2 Q0 Q1
P0
P1
P2
D S
S
D
E0
S2
S2
S1
S1
E2
Fi ure 1A.11 Demand C an e Offer Fix
Price
Quantity
S
0 Q2 Q0 Q1
P0
D
D
S
E0
P2
P1
D1
D1
D2
D2
E1
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MARKET EQUILIBRIUM
Equilibrium Price & Quantity
Rationing Function of Prices
Changes in Demand Changes in Quantity
Demanded
Changes in Supply
Changes in Quantity Supplied
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Complex Cases
Supply Increases;Demand DecreasesPrices DecreaseQuantity Indeterminate
Supply Decreases;
Demand IncreasesPrice IncreasesQuantity Indeterminate
Multiple Shifts
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Complex Cases
Supply Increases;Demand IncreasesPrices IndeterminateQuantity Increases
Supply Decreases;
Demand DecreasesPrice IndeterminateQuantity Decreases
Multiple Shifts
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Government Set Prices
Price CeilingsShortages
Rationing ProblemBlack Markets
Rent Controls
Price FloorsSurpluses
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Price Ceiling
A maximum price that sellers may charge for a good,
usually set by government.
Excess Demand
(Shortage)
Created by a
Price Ceiling
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Price ceiling
Price Rationing :The process by which the market system
allocates goods and services to consumers when quantity
demanded exceeds quantity supplied.
Ration coupons Tickets or coupons that entitle
individuals to purchase a certain amount of a given product
per month.
Black market A market in which illegal trading takes
place at market-determined prices.
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PRICE FLOORS
Price floor A minimum pricebelow which exchange is not
permitted.
Minimum wage A price floorset under the price of labor.
Agricultural Products
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Effect of Tax & Subsidy
TAX
Determined by government
Commonly need to be paid by producer and consumers
AIM :
Source of revenue
Reducing usage of products
SUBSIDY
Offer by government, in term of aid.
Given to the producer.
AIM :
To reduce cost engaged by the producer
Reducing price of product.
To help local producer to be at par with foreign producer (highquality product but cheaper price)
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Effect of Tax Market Equilibrium
Fi ure 1A.13 Tax paid by consumer and
Producer
(Imperfect flexible Product)
E
Price
Quantity
S1
0 Q2 Q1
P0
D
DS1
P2
P1
S2
S2
B
F
A
Consumer
Producer
TAX PAID BY CONSUMERS > PRODUCER
S2
Fi ure 1A.14 Tax paid by consumer and
Producer (Flexible Product)
A
E
Price
Quantity
S1
0 Q2 Q1
P0
D
D
S1
P2
P1
S2
S2
B
F
Consumer
ProducerS2
TAX PAID BY CONSUMERS < PRODUCER
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Effect on Tax- Market Equilibrium
Fi ure 1A.16 Tax paid by Customer & Producer
(Perfect flexible Product Demand)
Fi ure 1A.15 Tax paid by Customer &
Producer
( Imperfect flexible Product Demand)
A
CUSTOMER NOT WILLING TO BUY
PRODUCT IF P >OP1
Price
Quantity
S1
0 Q2 Q1
P1 D
S1
S2
B
S2
Price
Quantity
S1
0 Q
D
S1
P2
P1
S2
S2
TAX PAID BY CUSTOMERS
(ex : luxury products, highly income group)
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Effect on Subsidy- Market Equilibrium
Fi ure 1A.17 Subsidy & its effect on Demand
C
Price
Quantity
S2
0 Q1 Q2
P0
D
S2
P1
P2
S1
S2
E
A
Customer
Producer D
B
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E1 E0
Government Intervention Price System
Fi ure 1A.18 Minimum Price Concept
PROTECTS PRODUCERS RIGHT
Price
Quantity0 Q2 Q1
P2
P1
P1
D
D
A
S0
S0
S1
S1
E0
MinimumPrice
B
Fi ure 1A.19 Maximum Price Concept
Price
Quantity
S
0 Q0 Q1
P2
S
P0
P1
D1
D1
D0
D0
E1
MaximumPrice
A B
PROTECTS CUSTOMERS RIGHT