Federal Urdu University Islamabad

Faculty of Management Sciences

(Department of Business Administration)

Lecture # 3
Course Title: ‘Principles of Micro Economics’
Course Instructor: Ms. Maryam Bibi
Course Code: ECO-105
Educational Level: Bachelor
 P

Graph 2
$1

D D’
6 12 Q
Graph 3 P

$1

D’ D

6 12 Q
Graph 5A S Graph 5B
P S’ S’
P S
$1 $1

6 12 Q 6 12 Q
 Graph 6

P
S
Green Line above Shows
Surplus Surplus=12-4=8
$2

E
$1 Red line below
shows
shortage=10-2=8
$0.5 Shortage D

2 4 6 10 12 Q
 Explanation

 Assume that initially economy is at equilibrium level where, equilibrium price

is $1 and equilibrium quantity is six units.
 If prices are somehow settled above equilibrium price level that is P = $2 then
producer will start producing more as we can see in diagram he produces 12
units but this causes surplus in the market as demand by consumers declines
due to rise in prices that is only four units. Hence in the case of excess supply,
sellers will be left holding excess stocks, and price will adjust downwards and
supply will be reduced and market readjust.
 Alternatively if prices are so low even below equilibrium price then consumers
will raise their demand for same commodity as shown in diagram by 10 units
but on the other hand supply is low that is 2 units. In the case of excess
demand, sellers will quickly run down their stocks, which will trigger a rise in
price and increased supply. The more efficiently the market works, the quicker
it will readjust to create a stable equilibrium price.
 Graph 7

P
S

$1.5 E’

E
$1

D’
D
6 10 12 Q
 Adjustment to the changes in Supply

 Market supply curve of commodity shifts as a result of changes

in technology.
 Consider the graph which shows rightward shift in supply curve
due to fall in price of beef.
 As a result there is surplus of six burgers at price P=$ 1
 Seller will reduce the production to get rid of surplus.
 Hence new equilibrium G will be attained where quantity
demanded increases as price is now at low level P= $0.5
 Graph 8

S
P

S’
E
$1
G
$0.5

6 8 12 Q