1. Market Equilibrium 1 Zulkhairi Nisa-Sg Petani Campus CHAPTER 4

2. Market equilibrium is the condition when the quantity demanded equal to quantity supplied (DD=SS) Point E is the equilibrium where demand equals supply Shortage occurs when quantity demanded is greater than quantity supplied Surplus occurs when quantity supplied is greater than quantity demanded. Price (P) S Surplus, Qs > Qd E Pe Surplus, Qd > Qs D (Q) Quantity Qe 2 Zulkhairi Nisa-Sg Petani Campus

3. Summary of Market Conditions 3 Zulkhairi Nisa-Sg Petani Campus

4. Shift in Demand and Supply Shift in demand and supply is unchanged Increase in demand Decrease in demand Shift in supply and demand is unchanged Increase in supply Decrease in supply A simultaneous change in demand and supply Supply and demand both increase Supply and demand both decrease Supply increase while demand decrease Supply decrease while demand increases 4 Zulkhairi Nisa-Sg Petani Campus

6. The Effects of Tax On Equilbrium Price And Quantity What is tax? Part of sources on government revenue Why government Imposed tax? To restrict consumption by reducing demand or supply or both. Especially for the harmful goods such as cigarettes and alcohol. 6 Zulkhairi Nisa-Sg Petani Campus

7. Taxes There are two types of taxes: Indirect taxes Direct taxes What is indirect tax? Tax on goods and services. The burden of paying tax can shift from the sellers to the end-users (consumer) What is direct tax? Tax impose directly to the particular person and the burdens can’t shift to others 7 Zulkhairi Nisa-Sg Petani Campus

9. The equilibrium price and quantity are RM2.00 and 6 millions units respectively.

10. Assumed that the government imposed excise tax which is amount of RM0.70 per unit.

11. Supply curve S0S0 will shift to the left to STST, holding demand curve DD remains unchangedPrice (P) ST S0 E’ 2.50 2.00 1.80 E ST D S0 Q 4 6 (million) 8 Zulkhairi Nisa-Sg Petani Campus

13. The new equilibrium price and quantity are RM2.50 and 4 millions units.

14. By referring to the original supply curve S0S0; before tax imposition, if producer produces 4 millions units, he is able to sell at RM1.80.

15. In other words, the tax per unit that being levied by the government is the difference between RM2.50 and RM1.80.Price (P) ST S0 E’ 2.50 2.00 1.80 E ST D S0 Q 4 6 (million) 9 Zulkhairi Nisa-Sg Petani Campus

17. From RM0.70, tax per unit is levied, RM 0.50 tax per unit paid by consumers and RM0.20 tax per unit paid by producer.

18. The tax accruing to the government is: tax revenue=tax per unit*quantity sold =RM0.70*4million =RM2.8million Price (P) ST S0 E’ 2.50 2.00 1.80 E ST D S0 Q 4 6 (million) 10 Zulkhairi Nisa-Sg Petani Campus

20. Islam forbids price controls under normal circumstances because they are unfair to both buyers and sellers

21. Maximum price is unjust to the sellers and producers where as minimum price is unfair to the buyers.

22. Islam allows the government to control price if it is proven that the increase and decrease in prices are due to injustice or manipulation of the market.11 Zulkhairi Nisa-Sg Petani Campus