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Assignment No. 02
Engineering Economics
PC Mubashar Sharif Reg. No. 2009-462

Lec. Engr. Afshan Naseem

Problem Definition:

Given below is a graph of a supply and demand curve which intersect (or cross) each other. You can put in your own numbers for price and quantity for P 0, P1, Q0, Q1 etc. I. The Government has established a ceiling price of Rs. 50000 for one LCD. What occurs at this point? Equilibrium, surplus or shortage? Explain. Do you expect this price to be stable, if there was no ceiling price? If this is not equilibrium, what is the equilibrium price and equilibrium quantity? What happens to the supply of good B now if the price of good B is expected to fall? Plot what happens, and indicate the new equilibrium.

II. III. IV.

Solution:

In solution to given assignment, I have assumed the market information as one summarized in the following data table, showing quality demanded and quantity supplied at different certain prices and remarking corresponding market condition and the price pressure.

Price 80000 70000 60000 50000 40000 30000 20000 10000 0

QD 50 100 150 200 250 300 350 400 450

QS 500 450 400 320 250 200 140 60 0

Mkt. Cond. excess supply excess supply excess supply excess supply Equilibrium excess demand excess demand excess demand excess demand

Price Pressure Down Down Down Down None Up Up Up Up

Below is shown a graph for the above market data, with corresponding demand and supply curves; yellow mark being representing the equilibrium condition.

i)

ii)

iii)

iv)

At 50,000 ceiling price, the surplus supply will occur since it is above the equilibrium state and hence the price will tend to fall. Because at ceiling price the quantity supplied (approx. 340) is much more than the quantity supplied (approx. 200) at this price. Hence the price will tend to fall. Even if there were no ceiling price, the price would not be stable because of the supply surplus, and hence the supply curve will fall in this case, whether there is a ceiling price or not. The equilibrium will exist where the supply curve and demand curve meet/ intersect each other (marked yellow on the graph above). According to the presumed values of Price and Quantity, the price at equilibrium will be approx. 38,500 and the quantity supplied will be around 255. If price of LCDs falls, the price will decrease and the supply curve will tend to fall down and the new equilibrium point will also shift downwards on the graph as shown in the following graph: