Engineerin Economics Chapter (Eng. Eco) 003

7/29/2019 Engineerin Economics Chapter (Eng. Eco) 003

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By

Muhammad Shahid Iqbal

Module No. 03

Equilibrium & Disequilibrium

Engineering

Economics


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Shortage

Lets say that Loonys uptown decides to sell their CDs for

$3 each.

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

buy CDs than Loonys has to sell.

Why? Because at such a low price, the quantity demanded is

quite high. But Loonys 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 notcorrectto say Demand exceeds Supply, but rather

quantity demanded exceeds quantity supplied.


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Result of Shortage:

If you are the manager of

Loonys and you find that

you are selling out of CDs

at $3, what do you want todo?

Raise the price

Buyers cant 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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Lets say that as the manager, you raised the prices of CDsto $20.

At $20 you would love to sell a lot of CDs, but not a lot ofpeople are willing to pay $20 for a CD.

So the CDs keep piling up as they come in from yoursupplier, but they dont seem to be going out the door insales.

This situation is called a surplus

Surplus - when Qs > Qd at current market price. Amount of surplus = Qs - Qd

Note - notcorrectto say Supply exceeds Demand, butrather that quantity supplied exceeds quantitydemanded.

Surplus


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Result of Surplus:

As manager you have to

decide what do with all

these CDs that are piling up

and not selling. What doyou do?

Have a sale!

Firms have more than they

can sell. Therefore, firms

lower price to sell theproduct.

As price decreases, Qd

increases and Qs decreases

P will decrease

Results of Surplus

P

Q

S

D

E

P*

Q*0

Psur

Qd

Qs

Amount of Surplus


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Note that if the price is below P* thenthere will be a shortage causing

price to rise

If the price is above P* then there willbe a surplus causing price to fall

Its as if P* is a magnet that keepsdrawing price to it (andconsequently quantity to Q*)

This magnet is sometimes called TheInvisible Hand

Equilibrium - where quantity

demanded equals quantitysupplied represented by theintersection of the demand andsupply curves.

Equilibrium Price (P*) - price whereequilibrium occurs.

Equilibrium in the Market


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Remember that Supply and Demand are drawn under theceteris paribus assumption.

Any factors which cause Supply and/or Demand to changewill affect equilibrium price and quantity.

Demand will change for any of the factors discussedpreviously.

An outward (rightward) shift in demand increases bothequilibrium 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, agreater quantity is demanded, as from the initial curve D1to the new curve D2.

Increase in Demand


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In the diagram, this raises theequilibrium price from P1 to thehigher P2. This raises theequilibrium quantity from Q1 tothe higher Q2.

there has been an increase indemand which has caused anincrease in (equilibrium)quantity.

The increase in demand could alsocome from changing tastes andfashions, incomes, price changes

in complementary and substitutegoods, market expectations, andnumber of buyers.

This would cause the entire demandcurve to shift changing theequilibrium price and quantity.

Increase in Demand

P

Q

S

D1

E

P1

Q10

D2

EP2

Q2


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

If the demand starts at D1,and decreases to D2

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 notshifted;

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

in demand.

Decrease in Demand

P

Q

S

D1

EP1

Q10

D2

EP2

Q2


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

but increases the equilibrium quantity

When the suppliers' unit input costs change, or when technological

progress occurs, the supply curve shifts.

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

So, producers will be willing to supply more wheat at every price

and this shifts the supply curve S1 outward, to S2.

This increase in supply causes the equilibrium price to decrease from

P1 to P2.

The equilibrium quantity increases from Q1 to Q2 as consumers

move along the demand curve to the new lower price.

As 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 S2,and shifts leftward to S1,

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

lower quantity demanded. Due 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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Supply will

change for any

of the factors

discussed

previously.

For instance,

lets say that

the government

lowers taxes onCDs

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:

First examine what happens to equilibrium price andquantity when just demand shifts.

Second, examine what happens to equilibrium price andquantity 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


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Increase in Supply and Demand

P

Q

S

D

E

P*

Q*0

D

EP*

Q*

S


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P

Q

S

D

E

P*

Q*0

D

EP*=

Q*

S

Increase in Supply and Demand

Engineerin Economics Chapter (Eng. Eco) 003

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