Market Equilibrium Analysis

LectureLecture--22

Managerial EconomicsManagerial Economics

Lecture Delivered byLecture Delivered byProf. Muhammad AzeemProf. Muhammad Azeem

www.azmeco.blogspot.com

Assuming all other things held Assuming all other things held constant, with a decrease in the price constant, with a decrease in the price of a good, the quantity demanded will of a good, the quantity demanded will increase. increase.

Assuming all other things held Assuming all other things held constant, with an increase in the price constant, with an increase in the price of a good, the quantity demanded will of a good, the quantity demanded will decrease.decrease.

Law of Demand www.azmeco.blogspot.com

Slide-2

PP QQdd

11 121222 101033 8844 6655 44

00 44 66 88 1010 1212

55

44

33

22

11

e

cb

a

dPRICE

QUANTITY DEMANDED

D

Law of Demand www.azmeco.blogspot.com

Slide-3

4

Assuming all other things held constant, with Assuming all other things held constant, with a decrease in the price of a good, the quantity a decrease in the price of a good, the quantity supplied will decrease. supplied will decrease.

Assuming all other things held constant, with Assuming all other things held constant, with an increase in the price of a good, the an increase in the price of a good, the quantity supplied will also increase.quantity supplied will also increase.

Law of Supply www.azmeco.blogspot.com

Slide-4

5

PP QQss

11 44

22 66

33 88

44 1010

55 1212 00 44 66 88 1010 1212

55

44

33

22

11

c

ba

d

PRICE

Quantity Supplied

e

S

Law of Supply www.azmeco.blogspot.com

Slide-5

6

Market equilibriumMarket equilibrium is point where buyers and is point where buyers and seller reach the compromise and settle down the seller reach the compromise and settle down the price of the commodity. At this price quantity price of the commodity. At this price quantity demanded is equal to the quantity supplied. In demanded is equal to the quantity supplied. In diagram both curves intersect at this equilibrium diagram both curves intersect at this equilibrium level. This is a stable equilibrium.level. This is a stable equilibrium.

Market Equilibrium www.azmeco.blogspot.com

Slide-6

7

PP QQdd QQss

11 1212 4422 1010 6633 88 8844 66 101055 44 1212

Market Equilibrium www.azmeco.blogspot.com

Slide-7

8

PP QdQd QsQs

11 1212 44

22 1010 66

33 88 88

44 66 1010

55 44 121200 44 66 88 1010 1212

55

44

3322

11

ePRICE

Quantity

D

S

Market Equilibrium www.azmeco.blogspot.com

Slide-8

Point e is market equilibrium point.

9

Market Equilibrium is Stable www.azmeco.blogspot.com

Slide-9

Quantity

Price

P

Q

D S

E

S>D

D>S

Due to shortage prices are pulled down to equilibrium point, and due to surplus prices are pushed up to equilibrium level. As a result market equilibrium remains stable.

LetLet

QQdd = 14 = 14 -- 2P2PQQss = 2 + 2P= 2 + 2PD = SD = S

Mathematical Form of Market Equilibrium Model www.azmeco.blogspot.com

Slide-10

This is a simple mathematical form of market equilibrium model. Demand and supply curves are assumed to be linear. Slope of the both curves is same.

11

Balloon is hanging over the wall.It expands in the day and contracts in the night. This is an example of changes in the volume of balloon. This change is due to the air pressure inside the balloon.

Changes in Demand and Supply www.azmeco.blogspot.com

Slide-11

12

Hanging Balloon moves upward and downwards. Due to the change in the supporting thread. This is an example of changes in the level of height of balloon. This change is due to the change in the size of thread.

Changes in Demand and Supply www.azmeco.blogspot.com

Slide-12

13

Quantity

Price

P0

Q0

P1

Q1

An increase in price causes a decrease in quantity demanded.

a

b

Change in Quantity Demanded-Due to price www.azmeco.blogspot.com

Slide-13

14

Quantity

Price

P0

Q0

P1

Q1

A decrease in price causes an increase in quantity demanded.

a

b

Changes in Quantity Demanded-Due to price www.azmeco.blogspot.com

Slide-14

15

Quantity

Price

P1

Q1

P0

Q0

A decrease in price causes a decrease in quantity supplied.

a

b

Changes in Quantity Supplied-Due to price www.azmeco.blogspot.com

Slide-15

16

Quantity

Price

P0

Q0

P1

Q1

An increase in price causes an increase in quantity supplied.

a

b

Changes in Quantity Supplied-Due to price www.azmeco.blogspot.com

Slide-16

17

Changes in Income of consumersChanges in Income of consumersChanges in Taste of the consumersChanges in Taste of the consumersChanges in the market size (no. of buyers)Changes in the market size (no. of buyers)Changes in the price of related goods/servicesChanges in the price of related goods/services

Shift Factors of Demand www.azmeco.blogspot.com

Slide-17

18

Quantity

Price

P0

Q0 Q1

Rise in demand shows a rightward shift in the market demand curve.

a b

Changes in Demand - Due to shift factors www.azmeco.blogspot.com

Slide-18

D0 D1

19

Quantity

Price

P0

Q1 Q0

b a

Changes in Demand - Due to shift factors www.azmeco.blogspot.com

Slide-19

Fall in demand shows a leftward shift in the market demand curve.

D1 D0

20

Changes in state of technologyChanges in state of technologyChanges in the prices of factors inputChanges in the prices of factors inputChanges in the market size (no. of sellers)Changes in the market size (no. of sellers)Changes in the Government policy (incentives)Changes in the Government policy (incentives)

Shift Factors of Supply www.azmeco.blogspot.com

Slide-20

21

Quantity

Price

P0

Q1Q0

S0 S1

a b

Changes in Supply - Due to shift factors www.azmeco.blogspot.com

Slide-21

Rise in supply shows a rightward shift in the supply curve.

22

Quantity

Price

P0

Q1 Q0

Fall in supply shows a leftward shift in the supply curve.

S0S1

b a

Changes in Supply - Due to shift factors www.azmeco.blogspot.com

Slide-22

23

Quantity

Price

P0

Q0

D0 S0

Q1

P1

Rise in demand will cause the market equilibrium price and quantity to increase.

E0

E1

D1

Effects of Changes in Demand on Market Equilibrium Point www.azmeco.blogspot.com

Slide-23

24

Quantity

Price

P1

Q1

S0

Q0

P0

D0

Fall in demand will cause the market equilibrium price and quantity to decrease.

E0

E1

Effects of Changes in Demand on Market Equilibrium Point www.azmeco.blogspot.com

Slide-24

25

Quantity

Price

P0

Q0

D0 S0

Q1

P1

Rise in supply will cause the market equilibrium price to decrease and quantity to increase.

E0

E1

Effects of Changes in Supply on Market Equilibrium Point www.azmeco.blogspot.com

Slide-25

26

Quantity

Price

P1

Q1

D0

Q0

P0

Fall in supply will cause the market equilibrium price to increase and quantity to decrease.

S0

E1

E0

S1

Effects of Changes in Supply on Market Equilibrium Point www.azmeco.blogspot.com

Slide-26

27

D

DDDS S S

S S S

S S S

Effects of Simultaneous Changes in Demand and Supply www.azmeco.blogspot.com

Slide-27

28

D

DDDS S S

S S S

S S S

SS

= DD

S D

SS

=

S

DDD

= DDD

SSS

SDD

= DSS

1 2 3

4

5

678

91011

121314

151617

Effects of Simultaneous Changes in Demand and Supply www.azmeco.blogspot.com

Slide-28

29

Quantity

Price

D0 S0

1

P0 = 3

Q0 = 8

E

No Change in Demand and Supply www.azmeco.blogspot.com

Slide-29

30

Quantity

Price

P0 = 3

Q0 = 8

D0

Q1 = 10

P1 = 2

S1

E1

E0

S02

No Change in Demand and Rise in Supply www.azmeco.blogspot.com

Slide-30

31

Quantity

Price

P1 = 4

Q1 = 6

D0

Q0 = 8

P0 = 3

S0

E0

E1

S13

No Change in Demand and Fall in Supply www.azmeco.blogspot.com

Slide-31

32

Quantity

Price

P1 = 4

Q1 = 10

D0

Q0 = 8

P0 = 3

S0

D1

E0

E1

4

No Change in Supply and Rise in Demand www.azmeco.blogspot.com

Slide-32

33

Quantity

Price

P0 = 3

Q0 = 8

D1

Q1 = 6

P1 = 2

S0

D0

E1

E0

5

No Change in Supply and Fall in Demand www.azmeco.blogspot.com

Slide-33

34

Quantity

Price

D0

Q1 = 12

P0 = 3

S1D1

E0 E1

S0

Q0 = 8

6

Rise in Demand Is Equal to Rise In Supply www.azmeco.blogspot.com

Slide-34

35

Quantity

Price

D0

Q1 = 14

P0 = 3

S1D1

E0E1

S0

Q0 = 8

P1 = 2

7

Rise in Demand Is Less Than Rise In Supply www.azmeco.blogspot.com

Slide-35

36

Quantity

Price

D0

Q1 = 14

P0 = 3

S1D1

E0

E1

S0

Q0 = 8

P1 = 4

8

Rise in Demand Is More Than Rise In Supply www.azmeco.blogspot.com

Slide-36

37

Quantity

Price

D0

P0 = 3

S1D1

E0

E1

S0

Q0 = 8

P1 = 59

Rise in Demand Is Equal To Fall In Supply www.azmeco.blogspot.com

Slide-37

38

Quantity

Price

D0

Q0 = 8

P1 = 5

S1D1

E0

E1

S0

Q1 = 6

10

P0 = 3

Rise in Demand Is Less Than Fall In Supply www.azmeco.blogspot.com

Slide-38

39

Quantity

Price

D0

Q1 = 10

P0 = 3

S0D1

E0

E1

S1

Q0 = 8

P1 = 511

Rise In Demand Is More Than Fall In Supply www.azmeco.blogspot.com

Slide-39

40

Quantity

Price

D1

P1 = 2

S1D0

E1

E0

S0

Q0 = 8

P0 = 3

12

Fall In Demand Is Equal to Rise In Supply www.azmeco.blogspot.com

Slide-40

41

Quantity

Price

D1

Q1 = 10

P0 = 3

S1D0

E0

E1

S0

Q0 = 8

P1 = 1

13

Fall In Demand Is Less Than Rise In Supply www.azmeco.blogspot.com

Slide-41

42

Quantity

Price

D1

P0 = 3

S1D0

E0

E1

S0

Q0 = 8

P1 = 1

14

Q1 = 6

Fall In Demand Is More Than Rise In Supply www.azmeco.blogspot.com

Slide-42

43

Quantity

Price

D1

Q0 = 8

P0 = 3

S0D0

E1 E0

S1

Q1 = 4

15

Fall In Demand Is Equal To Fall In Supply www.azmeco.blogspot.com

Slide-43

44

Quantity

Price

D1

Q1 = 4

P0 = 3

S0

D0

E1E0

S1

Q0 = 8

16P1 = 4

Fall In Demand Is Less Than Fall In Supply www.azmeco.blogspot.com

Slide-44

45

Quantity

Price

D1

Q0 = 8

P0 = 3

S0D0

E1

E0

S1

Q1 = 4

17

P1 = 2

Fall In Demand Is More Than Fall In Supply www.azmeco.blogspot.com

Slide-45

46

Quantity

Price

P1

S0

D

E0

E1

S1

Q

P0

S2

E2P2

Perfectly Inelastic Demand

Curve

1

Perfectly Inelastic Demand Curve And Changes In Supply www.azmeco.blogspot.com

Slide-46

47

Quantity

Price

P1

D0

S

E0

E1

D1

Q

P0

D2

E2P2

Perfectly Inelastic SupplyCurve

2

Perfectly Inelastic Supply Curve And Changes In Demand www.azmeco.blogspot.com

Slide-47

48Quantity

Price

S0

E0 E2

S1

Q0

S2

E1P

Perfectly Elastic

Demand Curve

3

Q1 Q2

D

Perfectly Elastic Demand Curve And Changes In Supply www.azmeco.blogspot.com

Slide-48

49Quantity

Price

P1

D0

SE0E1

D1

Q1

P0D2

E2P2

Perfectly ElasticSupplyCurve

4

Q0 Q2

Perfectly Elastic Supply Curve And Changes In Demand www.azmeco.blogspot.com

Slide-49