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Lecture 2

Lecture 2. Changes in Demand and Supply. Movement along the curve If there is change in price then there will be a movement along the demand and supply curve. Shift of the curve

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Lecture 2

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  1. Lecture 2

  2. Changes in Demand and Supply Movement along the curve • If there is change in price then there will be a movement along the demand and supply curve. Shift of the curve • If there is a change in any factor/ variable other than price (such as: income, taste, price of other goods like substitute and complementary good etc.) then there will be a shift in the curve.

  3. Determination of Equilibrium • The point at which demand curve cuts supply curve is the equilibrium. Equilibrium price and quantity are determined from equilibrium point. • It shows stability. • Any price greater than equilibrium price will create excess supply which is a unstable situation. In this case price needs to fall to attain equilibrium. • Any price lower than equilibrium price will create excess demand. In this case price needs to increase to attain equilibrium.

  4. Excess Supply • If price is higher than equilibrium price then quantity supplied will be greater than quantity demanded. So in this case there will an excess supply in the market that is producers can’t sell their products. • Competition among producers to increase sales leads to a downward pressure on price and so they need to lower the price to sell out their product. • If the price decreases then the quantity demanded increases and quantity supplied decreases. So the excess supply decreases ( the gap between supply and demand curve decreases). This process will continue until equilibrium price is reached where quantity demanded is equal to quantity supplied.

  5. Excess Demand • If price is lower than equilibrium price then quantity demanded will be greater than quantity supplied. So in this case there will an excess demand in the market. • To meet the excess demand, producer will increase the supply but they will do this if they get a higher price. So there is an upward pressure on price. • When the price increases the quantity demanded decreases and quantity supplied increases. So the excess demand decreases. This process will continue until equilibrium price is reached where quantity demanded is equal to quantity supplied.

  6. Difference between Individual Demand and Market Demand • Individual Demand Curve: Individual Demand Curve shows how much a single consumer will demand at different prices. • Market Demand Curve: It shows how much all consumers demand in total at different prices. • We can define individual supply and market supply in the same way.

  7. Change in equilibrium due to shift in demand • If there is a rightward shift in demand ( say for an increase in income) then a new equilibrium will restore at a higher price and higher quantity.

  8. Change in equilibrium due to shift in Supply • If there is a rightward shift in Supply ( say for an increase in production due to good weather) then a new equilibrium will restore at a lower price and higher quantity.

  9. Change in equilibrium due to shift in both demand and supply • Suppose there is an increase in demand of food during Ramadan which leads to a new equilibrium at E2. This leads to a higher price P2 and a higher quantity Q2. Now to stabilize the price govt. decides to increase the supply of food. This will change the equilibrium to E3 where the price has got back to its initial value of P1 and quantity is increased further to Q3.

  10. Demand & Supply Equation and Determination of Equilibrium Price and Quantity • Demand: Qd= 286 − 20p • Supply: Qs = 88 + 40p • In Equilibrium: Qd = Qs 286 − 20p = 88 + 40p 60p = 198 P = 3.30 So Equilibrium Price = 3.30 And Q = 286 – 20(3.3) = 220 So Equilibrium Quantity=220

  11. Exercise • What will happen to the equilibrium price and quantity of car if the oil price goes up? • What will happen to the equilibrium price and quantity of Pepsi if the price of Coke decreases? • Find the equilibrium price and quantity if Demand: Qd= 286 − 20p Supply: Qs = 88 + 40p • Suppose there is a war in Syria. What will happen to price and quantity of bread due to war? • Suppose our population increases from 2012 to 2013. What will be the impact on the price and quantity of rice due to this? If we invent a new pesticide in 2012 how do your answer changes?

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