Market Equilibrium Analysis

Lecture-2

Managerial Economics

Lecture Delivered by
Prof. Muhammad Azeem
www.azmeco.blogspot.com

Law of Demand
Slide-2

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

Law of Demand
Slide-3

P Qd D
5 e
P
1 12 d
R 4
2 10 I c
3
3 8 C
b
E 2
4 6 1 a
5 4
0 4 6 8 10 12

QUANTITY DEMANDED

Law of Supply
Slide-4

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

4

Law of Supply
Slide-5

S
P Qs
P 5
e
1 4 R 4
d
2 6 I
3 c
C
3 8 E 2
b
1
4 10 a
5 12 0 4 6 8 10 12

Quantity Supplied
5

Market Equilibrium
Slide-6

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

6

Market Equilibrium
Slide-7

P Qd Qs
1 12 4
2 10 6
3 8 8
4 6 10
5 4 12

7

Market Equilibrium
Slide-8

Point e is market equilibrium
point.
P Qd Qs
S
1 12 4 P
5

4
2 10 6 R e
I 3
3 8 8 C 2
E
4 6 10 1
D
5 4 12
0 4 6 10 12
8
Quantity

8

Market Equilibrium is Stable
Slide-9

Due to shortage prices
Price are pulled down to
equilibrium point, and
due to surplus prices
D S are pushed up to
equilibrium level. As a
result market
S>D equilibrium remains
stable.
P E
D>S

Quantity
Q

9

Mathematical Form of Market Equilibrium Model
Slide-10

This is a simple mathematical
form of market equilibrium
model. Demand and supply
Let curves are assumed to be
linear. Slope of the both
Qd = 14 - 2P curves is same.

Qs = 2 + 2P
D=S

Changes in Demand and Supply
Slide-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.

11

Changes in Demand and Supply
Slide-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.

12

Change in Quantity Demanded-Due to price
Slide-13

Price An increase in price
causes a decrease in
quantity demanded.

P1 b

P0 a

Quantity
Q1 Q0

13

Changes in Quantity Demanded-Due to price
Slide-14

Price A decrease in price
causes an increase in
quantity demanded.

P0 a

b
P1

Quantity
Q0 Q1

14

Changes in Quantity Supplied-Due to price
Slide-15

A decrease in price
Price causes a decrease in
quantity supplied.

P0 a

P1 b

Quantity
Q1 Q0

15

Changes in Quantity Supplied-Due to price
Slide-16

An increase in price
causes an increase in
Price quantity supplied.

P1 b

P0 a

Quantity
Q0 Q1

16

Shift Factors of Demand
Slide-17

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

17

Changes in Demand - Due to shift factors
Slide-18

Rise in demand shows a
rightward shift in the market
Price demand curve.
D0 D1

a b
P0

Quantity
Q0 Q1

18

Changes in Demand - Due to shift factors
Slide-19

Fall in demand shows a
leftward shift in the market
Price demand curve.
D1 D0

b a
P0

Quantity
Q1 Q0

19

Shift Factors of Supply
Slide-20

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

20

Changes in Supply - Due to shift factors
Slide-21

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

S0 S1

a b
P0

Quantity
Q0 Q1

21

Changes in Supply - Due to shift factors
Slide-22

Fall in supply shows a leftward
shift in the supply curve.
Price
S1 S0

b a
P0

Quantity
Q1 Q0

22

Effects of Changes in Demand on Market Equilibrium Point
Slide-23

Price Rise in demand will cause
the market equilibrium price
D0 D1 S0 and quantity to increase.

P1 E1
P0
E0

Quantity
Q0 Q1

23

Effects of Changes in Demand on Market Equilibrium Point
Slide-24

Price
Fall in demand will cause
the market equilibrium price
D0 S0 and quantity to decrease.

P0 E0
P1 E1

Quantity
Q1 Q0

24

Effects of Changes in Supply on Market Equilibrium Point
Slide-25

Rise in supply will
Price cause the market
equilibrium price to
D0 S0 decrease and
quantity to
increase.

P0 E0
P1 E1

Quantity
Q0 Q1

25

Effects of Changes in Supply on Market Equilibrium Point
Slide-26

Price Fall in supply will
cause the market
equilibrium price to
D0 S1 S0 increase and
quantity to
decrease.

E1
P1
P0 E0

Quantity
Q1 Q0

26

Effects of Simultaneous Changes in Demand and Supply
Slide-27

D

D D D
S S S S S S

S S S

27

Effects of Simultaneous Changes in Demand and Supply
Slide-28

D

D D D
S S S S S S
1 2 3 5
S S S
4

S = D 6 S = D 9 S = D 12 S = D 15
S D 7 S D 10 S D 13 S D 16
S D 8 S D 11 S D 14 S D 17

28

No Change in Demand and Supply
Slide-29

1 Price

D0 S0

E
P0 = 3

Quantity
Q0 = 8
29

No Change in Demand and Rise in Supply
Slide-30

2 Price S0

D0 S1

E0
P0 = 3
P1 = 2 E1

Quantity
Q0 = 8 Q1 = 10
30

No Change in Demand and Fall in Supply
Slide-31

3 Price S1

D0 S0

E1
P1 = 4
P0 = 3 E0

Quantity
Q1 = 6 Q0 = 8
31

No Change in Supply and Rise in Demand
Slide-32

4 Price
D1
D0 S0

P1 = 4 E1
P0 = 3 E0

Quantity
Q0 = 8 Q1 = 10
32

No Change in Supply and Fall in Demand
Slide-33

5 Price
D0
D1 S0

P0 = 3 E0
P1 = 2 E1

Quantity
Q1 = 6 Q0 = 8
33

Rise in Demand Is Equal to Rise In Supply
Slide-34

6 Price
D1
S0
S1
D0

E0 E1
P0 = 3

Quantity
Q0 = 8 Q1 = 12
34

Rise in Demand Is Less Than Rise In Supply
Slide-35

7 Price
D1
S0
S1
D0

E0
P0 = 3 E1
P1 = 2

Quantity
Q0 = 8 Q1 = 14
35

Rise in Demand Is More Than Rise In Supply
Slide-36
Price

D1
8 D0 S0 S1

P1 = 4 E1
E0
P0 = 3

Quantity
Q0 = 8 Q1 = 14
36

Rise in Demand Is Equal To Fall In Supply
Slide-37

Price S0
S1
D0 D1
9 E1
P1 = 5

P0 = 3 E0

Quantity
Q0 = 8
37

Rise in Demand Is Less Than Fall In Supply
Slide-38
Price

D0 D1 S1 S0
10 E1
P1 = 5

P0 = 3 E0

Quantity
Q1 = 6 Q0 = 8
38

Rise In Demand Is More Than Fall In Supply
Slide-39
Price
D1 S1 S0
D0

11 E1
P1 = 5

E0
P0 = 3

Quantity
Q0 = 8 Q1 = 10
39

Fall In Demand Is Equal to Rise In Supply
Slide-40

Price

D1 D0
12 S0 S1

P0 = 3 E0

P1 = 2 E1

Quantity
Q0 = 8
40

Fall In Demand Is Less Than Rise In Supply
Slide-41

Price

D1 D0
13 S0 S1
E0
P0 = 3

P1 = 1 E1

Quantity
Q0 = 8 Q1 = 10
41

Fall In Demand Is More Than Rise In Supply
Slide-42

Price

D0
14 D1
S0 S1
E0
P0 = 3

E1
P1 = 1

Quantity
Q1 = 6 Q0 = 8
42

Fall In Demand Is Equal To Fall In Supply
Slide-43

Price

D1 D0
15 S1 S0

E1 E0
P0 = 3

Quantity
Q1 = 4 Q0 = 8
43

Fall In Demand Is Less Than Fall In Supply
Price Slide-44

D0
D1 S1 S0

16
E1
P1 = 4 E0
P0 = 3

Quantity
Q1 = 4 Q0 = 8
44

Fall In Demand Is More Than Fall In Supply
Slide-45
Price

D0
17 D1 S1 S0

E0
P0 = 3
P1 = 2 E1

Quantity
Q1 = 4 Q0 = 8
45

Perfectly Inelastic Demand Curve And Changes In Supply
Slide-46

Price D
S1 1
Perfectly
S0 Inelastic
E1 Demand
P1 Curve
S2
E0
P0

E2
P2

Quantity
Q
46

Perfectly Inelastic Supply Curve And Changes In Demand
Slide-47

Price S
2
Perfectly
Inelastic
E1 Supply
P1 Curve

P0 E0
D1
E2
P2
D0
D2
Quantity
Q
47

Perfectly Elastic Demand Curve And Changes In Supply
Slide-48

Price
3
Perfectly
Elastic
Demand
Curve
S2 S0 S1

E1 E0 E2
P D

Q1 Q0 Q2 Quantity
48

Perfectly Elastic Supply Curve And Changes In Demand
Slide-49

Price 4
Perfectly
Elastic
Supply
P1 Curve

P0 D1 D0 D2

E1 E0 E2
P2 S

Q1 Q0 Q2 Quantity
49

Market Equilibrium Analysis

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