chapter (eng. eco) 003

8/18/2019 Chapter (Eng. Eco) 003

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By

Muhammad Shahid Iqbal

Module No. 03Module No. 03

Equilibrium & Disequilibrium


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Supply and demand is an economic model of

price determination in a market.

It concludes that in a competitive market, the unit

price for a particular good will vary until it settlesat a point where the quantity demanded by

consumers (at current price) will equal the

quantity supplied by producers (at current price),

resulting in an economic equlibrium of price and

quantity.

Equilibrium in Market


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The four basic laws of supply and demand are:

If demand increases and supply remains unchanged, then it

leads to higher equilibrium price and quantity.

If demand decreases and supply remains unchanged, thenit leads to lower equilibrium price and quantity.

If supply increases and demand remains unchanged, then it

leads to lower equilibrium price and higher quantity.

If supply decreases and demand remains unchanged, thenit leads to higher price and lower quantity.

Equilibrium in Market


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Shortage

et!s say that oony!s uptown decides to sell their "#sfor $% each.

&ore than likely there will be a lot more people wantingto buy "#s than oony!s has to sell.

'hy ecause at such a low price, the quantitydemanded is quite high. ut oony!s does not want tosell that many at such a low price.

This situation is called a shortage

*hortage + when d - s at current market price. mount of *hortage / d + s 0ote + it is not correct to say #emand e1ceeds *upply,

but rather quantity demanded e1ceeds quantitysupplied.


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2esult of *hortage:

If you are the manager of

oony!s and you find that

you are selling out of "#s

at $%, what do you want to

do

2aise the price

uyers can!t get all they

want. Therefore,competition among buyers

drive prices up.

3 will increase

Results of Shortage

P

Q

S

D

E

P*

Q*4

Psh

Qs Qd


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et!s say that as the manager, you raised the prices of "#sto $54.

t $54 you would love to sell a lot of "#s, but not a lot of people are willing to pay $54 for a "#.

*o the "#s keep piling up as they come in from yoursupplier, but they don!t seem to be going out the door insales.

This situation is called a surplus

*urplus + when s - d at current market price.6 mount of surplus / s + d

0ote + not correct to say *upply e1ceeds #emand, butrather that quantity supplied e1ceeds quantity

demanded.

Surplus


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2esult of *urplus:

s manager you have to

decide what do with all

these "#s that are piling up

and not selling. 'hat doyou do

7ave a sale8

9irms have more than they

can sell. Therefore, firms

lower price to sell the product.

s price decreases, d

increases and s decreases

3 will decrease

Results of Surplus

P

Q

S

D

P*

Q*0

Psur

Qd

Qs

mount of *urplus


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0ote that if the price is below 3; thenthere will be a shortage causing

price to rise

If the price is above 3; then there will be a surplus causing price to fall

It!s as if 3; is a magnet that keepsdrawing price to it (andconsequently quantity to ;)

This magnet is sometimes called


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2emember that *upply and #emand are drawn under theceteris paribus assumption.

ny factors which cause *upply and>or #emand to changewill affect equilibrium price and quantity.

#emand will change for any of the factors discussed previously. n outward (rightward) shift in demand increases both

equilibrium price and quantity 'hen consumers increase the quantity demanded at a given

price, it is referred to as an increase in demand . Increased demand can be represented on the graph as the

curve being shifted to the right. t each price point, agreater quantity is demanded, as from the initial curve #?to the new curve #5.

Increase in Demand


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If the demand decreases,there is a shift of the curveto the left.

If the demand starts at #?,and decreases to #5

The equilibrium price willdecrease, and theequilibrium quantity willalso decrease.

The quantity supplied ateach price is the same as

before the demand shift,reflecting the fact that thesupply curve has not shifted@

but the equilibrium quantityand price are different as aresult of the change (shift) indemand.

Decrease in Demand

P

Q

S

D1

EP1

Q14

D2

E’P2

Q2


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n outward (rightward) shift in supply reduces the equilibrium price

but increases the equilibrium quantity

'hen the suppliersA unit input costs change, or when technological

progress occurs, the supply curve shifts.

ssume that someone invents a better way of growing wheat so thatthe cost of growing a given quantity of wheat decreases.

*o, producers will be willing to supply more wheat at every price and

this shifts the supply curve *? outward, to *5.

This increase in supply causes the equilibrium price to decrease from

3? to 35.

The equilibrium quantity increases from ? to 5 as consumers

move along the demand curve to the new lower price.

s a result of a supply curve shift, the price and the quantity move in

opposite directions.

Changes in Supply


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P

Q

S1

D

EP1

Q10

S2

P2

Q2

E’

Increase in Supply


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If the quantity supplieddecreases,

If the supply curve starts at *5,and shifts leftward to *?,

The equilibrium price willincrease and the equilibriumquantity will decrease asconsumers move along thedemand curve to the newhigher price and associated

lower quantity demanded. #ue to the change (shift) in

supply, the equilibriumquantity and price havechanged.

Decrease in Supply

P

Q

S1

D

P1

Q10

S2

P2

Q2

E’

E


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*upply will

change for any

of the factors

discussed

previously. 9or instance,

let!s say that

the government

lowers ta1es on"#s

Changes in Supply

P

Q

S

D

EP*

Q*0

S’

P*’

Q*’

E’


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To determine the impact of both supply and demandchanging:

9irst e1amine what happens to equilibrium price andquantity when Bust demand shifts.

*econd, e1amine what happens to equilibrium price andquantity when Bust supply changes

9inally, add the two effects together.

Ceneral 2esults:

'hen supply and demand move in the same direction6 quilibrium price is ambiguous

'hen supply and demand move in opposite directions6 quilibrium quantity is ambiguous

Changes in Demand and Supply


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Increase in Supply and Demand

P

Q

S

D

E

P*

Q*0

D’

E’P*’

Q*’

S’


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3

*

#

3;

;4

#!

!3;!/

;!

*!

Increase in Supply and Demand


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nalyDe what happens to the market for piDDa if the price

of tomatoes rises.

nalyDe what happens to the market for piDDa if the price

of hamburgers falls.

A C T I V E L E A R N I N G Market EquilibriumA C T I V E L E A R N I N G Market Equilibrium

chapter (eng. eco) 003

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