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Equilibrium in Market-Engineering Economics-Lecture Slides, Slides of Microeconomics

This lecture is part of lecture series for Engineering Economics course at M. J. P. Rohilkhand University. It was delivered by Dr. Badrinath Singh to cover following points: Equilibrium, Market, Supply, Demand, Price, Determination, Quantity, Changes, Invisible, Hand

Typology: Slides

2011/2012

Uploaded on 07/06/2012

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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 settles
at 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
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, then
it 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, then
it leads to higher price and lower quantity.
Equilibrium in Market
Shortage
Let’s say that Loony’s uptown decides to sell their CDs
for $3 each.
More than likely there will be a lot more people wanting
to buy CDs than Loony’s has to sell.
Why? Because at such a low price, the quantity
demanded is quite high. But Loony’s does not want to
sell that many at such a low price.
This situation is called a shortage
Shortage - when Qd > Qs at current market price.
Amount of Shortage = Qd - Qs
Note - it is not correct to say Demand exceeds
Supply, but rather quantity demanded exceeds
quantity supplied.
Result of Shortage:
If you are the manager of
Loony’s and you find that
you are selling out of CDs
at $3, what do you want to
do?
Raise the price
Buyers can’t get all they
want. Therefore,
competition among
buyers drive prices up.
P will increase
Results of Shortage
P
Q
S
D
E
P*
Q*
0
Psh
Qs Qd
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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 settles

at 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

 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, then

it 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, then

it leads to higher price and lower quantity.

Equilibrium in Market

Shortage

 Let’s say that Loony’s uptown decides to sell their CDs

for $3 each.

 More than likely there will be a lot more people wanting

to buy CDs than Loony’s has to sell.

 Why? Because at such a low price, the quantity

demanded is quite high. But Loony’s does not want to

sell that many at such a low price.

 This situation is called a shortage

 Shortage - when Qd > Qs at current market price.

 Amount of Shortage = Qd - Qs

 Note - it is not correct to say Demand exceeds

Supply, but rather quantity demanded exceeds

quantity supplied.

Result of Shortage:

 If you are the manager of

Loony’s and you find that

you are selling out of CDs

at $3, what do you want to

do?

 Raise the price

 Buyers can’t get all they

want. Therefore,

competition among

buyers drive prices up.

 P will increase

Results of Shortage

P

Q

S

D

E

P*

Q*

P

sh

Q

s Q

d

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 Let’s say that as the manager, you raised the prices of CDs

to $20.

 At $20 you would love to sell a lot of CDs, but not a lot of

people are willing to pay $20 for a CD.

 So the CDs keep piling up as they come in from your

supplier, but they don’t seem to be going out the door in

sales.

 This situation is called a surplus

 Surplus - when Q s

> Q

d

at current market price.

  • Amount of surplus = Q s

- Q

d

Note - not correct to say Supply exceeds Demand, but

rather that quantity supplied exceeds quantity

demanded.

Surplus

Result of Surplus:

 As manager you have to

decide what do with all

these CDs that are piling up

and not selling. What do

you do?

 Have a sale!

 Firms have more than they

can sell. Therefore, firms

lower price to sell the

product.

 As price decreases, Q d

increases and Q s

decreases

 P will decrease

Results of Surplus

P

Q

S

D

E

P*

Q*

P

sur

Q

d

Q

s

Amount of Surplus

Note that if the price is below P* then

there will be a shortage causing

price to rise

If the price is above P* then there will

be a surplus causing price to fall

It’s as if P* is a magnet that keeps

drawing price to it (and

consequently quantity to Q*)

This magnet is sometimes called “The

Invisible Hand”

Equilibrium - where quantity

demanded equals quantity

supplied represented by the

intersection of the demand and

supply curves.

Equilibrium Price (P*) - price where

equilibrium occurs.

Equilibrium in the Market

 Remember that Supply and Demand are drawn under the

ceteris paribus assumption.

 Any factors which cause Supply and/or Demand to change

will affect equilibrium price and quantity.

 Demand will change for any of the factors discussed

previously.

 An outward (rightward) shift in demand increases both

equilibrium price and quantity

 When 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. At each price point, a

greater quantity is demanded, as from the initial curve D

to the new curve D2.

Increase in Demand

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 If the quantity supplied

decreases ,

 If the supply curve starts at S2,

and shifts leftward to S1,

 The equilibrium price will

increase and the equilibrium

quantity will decrease as

consumers move along the

demand curve to the new

higher price and associated

lower quantity demanded.

 Due to the change (shift) in

supply, the equilibrium

quantity and price have

changed.

Decrease in Supply

P

Q

S

1

D

P

1

Q

1

S

2

P

2

Q

2

E’

E

 Supply will

change for any

of the factors

discussed

previously.

 For instance,

let’s say that

the government

lowers taxes on

CDs

Changes in Supply

P

Q

S

D

E

P*

Q*

S’

P*’

Q*’

E’

To determine the impact of both supply and demand

changing:

 First examine what happens to equilibrium price and

quantity when just demand shifts.

 Second, examine what happens to equilibrium price and

quantity when just supply changes

 Finally, add the two effects together.

General Results:

 When supply and demand move in the same direction

  • Equilibrium price is ambiguous

 When supply and demand move in opposite directions

  • Equilibrium quantity is ambiguous

Changes in Demand and Supply

Increase in Supply and Demand

P

Q

S

D

E

P*

Q*

D’

E’

P*’

Q*’

S’

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P

Q

S

D

E

P*

Q*

D’

E’

P*’=

Q*’

S’

Increase in Supply and Demand

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