Micro Economics for BusinessUnit 68 min read

Market Equilibrium & Govt Intervention – Supply, Demand, Taxes, Subsidies

Unit 6 of Micro Economics for Business: explains how supply and demand determine market prices, how shifts alter equilibrium, and how government tools like taxes, subsidies, price ceilings/floors and quotas reshape markets, with worked examples and real‑world applications.

Padhai · Based on the official syllabus and past papers
Updated 2 Oct 2026

Key points

Market equilibrium is the intersection of supply and demand curves, giving the price and quantity that clear the market.
Shifts in supply or demand change the equilibrium price and quantity; the direction of the shift determines whether price rises or falls.
Government interventions (taxes, subsidies, price controls, quotas) deliberately shift supply or demand to achieve policy goals, often creating dead‑weight loss.
Cost and revenue curves (average revenue, average cost, total revenue, total cost) help firms decide output levels and pricing strategies.
Real‑world firms use these concepts to set prices, design subsidies, and respond to regulatory changes.

Definitions

Market – A set of buyers and sellers interacting to exchange goods or services.
Supply – The quantity of a good that producers are willing and able to sell at each price.
Demand – The quantity of a good that consumers are willing and able to buy at each price.
Market equilibrium – The price and quantity at which quantity demanded equals quantity supplied.
Government intervention – Policies (taxes, subsidies, price ceilings/floors, quotas, regulation) that alter the natural market outcome.

Market Equilibrium

The basic relationship is captured by the intersection of the demand and supply curves.

The equilibrium point is where the two lines cross: $P^{*} = 5$ and $Q^{*} = 50$ .

How Equilibrium is Determined

Set quantity demanded equal to quantity supplied:
$Q_{d} (P) = Q_{s} (P)$
Solve for price $P^{*}$ .
Substitute back to find equilibrium quantity $Q^{*}$ .

Shifts in Supply and Demand

A shift occurs when a non‑price determinant changes (income, preferences, technology, input prices, taxes, subsidies, etc.).

Effect: With a rightward shift, equilibrium price falls while equilibrium quantity rises.

Similarly, a leftward shift raises price and lowers quantity.

Government Intervention

Governments intervene to correct market failures, redistribute income, or achieve policy objectives. The main tools are:

Tool	How It Works	Effect on Supply/Demand	Typical Policy Goal
Tax	Adds cost to producers or consumers	Shifts supply up (producers) or demand down (consumers)	Reduce consumption of harmful goods, raise revenue
Subsidy	Lowers cost for producers or consumers	Shifts supply down (producers) or demand up (consumers)	Promote desirable goods, support industries
Price Ceiling	Sets maximum price	Creates excess demand (shortage)	Protect consumers from high prices
Price Floor	Sets minimum price	Creates excess supply (surplus)	Protect producers, ensure minimum wages
Quota	Limits quantity that can be sold	Acts like a supply restriction	Protect domestic industry, control imports

Tax Example – Cigarette Tax

Demand: $Q_{d} = 350, 000 - 5, 000 P$
Supply: $Q_{s} = 50, 000 + 1, 500 P$

Tax shifts supply curve up by tax amount (e.g., 20 NPR per pack), reducing equilibrium quantity and raising price

Equilibrium without tax
$350, 000 - 5, 000 P = 50, 000 + 1, 500 P 300, 000 = 6, 500 P P^{*} = 46.15 Rs$ $Q^{*} = 350, 000 - 5, 000 (46.15) \approx 50, 000$
Tax of 10 Rs per cigarette
Supply shifts upward by 10: $Q_{s} = 50, 000 + 1, 500 (P - 10)$
New equilibrium: $350, 000 - 5, 000 P = 50, 000 + 1, 500 (P - 10) 300, 000 = 6, 500 P - 15, 000 315, 000 = 6, 500 P P_{after tax}^{*} = 48.46 Rs$ $Q_{after tax}^{*} = 350, 000 - 5, 000 (48.46) \approx 45, 200$

Result: Price rises by 2.31 Rs, quantity falls by 4,800 units. The tax burden is shared: producers receive 10 Rs less per unit, consumers pay 2.31 Rs more.

Subsidy Example – Solar Energy

Suppose the government gives a subsidy of 5 Rs per unit of solar electricity. Supply shifts downward by 5, increasing quantity and lowering price. The new equilibrium moves to a lower price and higher quantity, encouraging adoption of clean energy.

Subsidy shifts supply curve down by subsidy amount (e.g., 20 NPR per unit), increasing equilibrium quantity and lowering price

Price Ceiling – Daraz Example

Daraz may impose a price ceiling on a popular smartphone to keep it affordable. The ceiling is set below the natural equilibrium price, creating a shortage. Sellers may reduce supply or sell through informal channels.

Price Floor – Ncell Example

Ncell may set a price floor on mobile data to ensure profitability. The floor is above the equilibrium price, leading to a surplus of data plans that may be sold at discount or bundled.

Quota – Import Control

A quota limits the number of units that can be imported. It is equivalent to a vertical supply restriction, raising domestic prices and protecting local producers.

Cost and Revenue Analysis

Firms use cost and revenue curves to determine optimal output.

Quantity (Q)	Total Revenue (TR)	Total Cost (TC)	Average Revenue (AR)	Average Cost (AC)	Profit
10	1,100	2,200	110	220	-1,100
20	2,000	1,880	100	94	120
30	2,900	1,660	96.67	55.33	1,240
40	3,800	1,600	95	40	2,200
50	4,700	1,470	94	29.4	3,230

Worked Example
At $Q = 40$ :

$T R = 3, 800$
$T C = 1, 600$
$P r o f i t = T R - T C = 2, 200$

The firm maximizes profit where marginal revenue (MR) equals marginal cost (MC). For a linear MR: $M R = 300 - 0.002 Q$ and $M C = 20 + 0.0008 Q$ :

$300 - 0.002 Q = 20 + 0.0008 Q 280 = 0.0028 Q Q^{*} = 100, 000$

At this output, MR = MC = 260 Rs.

Comparison of Government Interventions

Intervention	Market Effect	Dead‑Weight Loss	Example
Tax	Reduces quantity, raises price	Yes	Cigarette tax
Subsidy	Increases quantity, lowers price	Yes	Solar subsidy
Price Ceiling	Creates shortage	Yes	Daraz smartphone
Price Floor	Creates surplus	Yes	Ncell data
Quota	Restricts supply	Yes	Import ban

Mermaid Diagram – Market Equilibrium Process

Market equilibrium where quantity demanded equals quantity supplied at P* = 500 NPR, Q* = 50 units

In the real world

Product	Idea Used	How It Works
eSewa	Price elasticity & supply‑side subsidies	eSewa offers lower transaction fees for merchants who use its payment gateway, effectively subsidizing the supply side of digital payments and increasing transaction volume.
Ncell	Price floor on data plans	Ncell sets a minimum price for 1 GB data to cover infrastructure costs, ensuring profitability while still offering competitive rates.
NEPSE	Price floor on certain stocks	The Nepal Stock Exchange imposes a floor price for government bonds to protect investors and maintain market stability.

Worked real‑world example – Ncell data plan
Suppose Ncell’s cost per GB is Rs 30. To cover costs and earn a 10 % margin, it sets a price floor at Rs 33. The floor is above the natural equilibrium price of Rs 28, creating a surplus of data plans. Ncell may bundle services or offer discounts to clear the surplus.

Exam tip

Know the formulas: $Q_{d} = a - b P$ , $Q_{s} = c + d P$ , $M R = d T R / d Q$ , $M C = d T C / d Q$ .
Practice shifting curves: Sketch how a tax, subsidy, price ceiling, or floor moves the supply/demand curves.
Work through worked examples: Solve for equilibrium before and after intervention; calculate changes in price, quantity, and consumer/producer surplus.
Use tables and figures: They often appear in exam questions; be able to interpret and draw them quickly.
Remember policy goals: Link each intervention to its intended outcome (revenue, welfare, market stability).

Based on the TU BBM syllabus for Micro Economics for Business (ECO203), unit 6.

Discussion

Loading…