Engineering

Economics

Module No. 003

Equilibrium & Disequilibrium

“if you want to improve the world first

improve yourself. if you want to improve
yourself, read a BOOK.”
 Equilibrium in Market
 Supply and demand is an economic model of price
determination in a market. It concludes that in a
competitive market, the unit price for a particular good
will vary until it settles at a point where the quantity
demanded by consumers (at current price) will equal the
quantity supplied by producers (at current price), resulting
in an economic equilibrium of price and quantity.
 Demand and supply in a market are described by the
equations
 Qd = 3550 - 266P and QS = 1800 + 240P
 Qs =1,050 and Qd = 2000-2.5P
 Qd = 500-4P and Qs = -100+2P
 Solve for the equilibrium price 'P'
 Equilibrium in Market
 The four basic laws of supply and demand are:
 If demand increases and supply remains unchanged, then it
leads to higher equilibrium price and quantity.
 If demand decreases and supply remains unchanged, then
it leads to lower equilibrium price and quantity.
 If supply increases and demand remains unchanged, then it
leads to lower equilibrium price and higher quantity.
 If supply decreases and demand remains unchanged, then
it leads to higher price and lower quantity.
 Shortage
 A shortage occurs whenever quantity demanded is greater
than quantity supplied at the market price. More people are
willing and able to buy the good at the current market price
than what is currently available. When a shortage exists, the
market is not in equilibrium. There are three main reasons
why a shortage can occur:
 Increase in demand (outward shift in demand curve)
 Decrease in supply (inward shift in supply curve)
 Government intervention
Price ceiling and Price Floor
(ban on the sale of a product
or service) like
Recreational drugs.
 Results of Shortage
Result of Shortage: As of 2016, chocolate makers face a shortage of
cocoa beans because of falling supplies of the raw commodity and
increased demand for chocolate. In 2015, global demand for
chocolate increased by 0.6% and rose to 7.1 million tons. However,
production of cocoa from leading cocoa bean suppliers in areas such
as Ghana and the Ivory Coast fell by 3.9%, and global supply of
cocoa beans was just 4.1 million tons. A factor in the increased
demand is that consumption of chocolate candy is on the rise in China
and India. Overall, the demand for cocoa in
Asia jumped by 5.9% in 2015.
As a result, the price of cocoa
in 2015 rose to over $3,000
per metric ton, the highest level
since 2012.
 Surplus
 If the market price is above the equilibrium price, quantity
supplied is greater than quantity demanded, creating a surplus.
Market price will fall.
 Surplus - when Qs > Qd at current market price.
• if you are the producer, you have a lot of excess inventory
that cannot sell. Will you put them on sale? It is most likely
yes. Once you lower the price of your product, your
product’s quantity demanded will rise until equilibrium is
reached.
Therefore, surplus drives
price down.
 Equilibrium in the Market
When the supply and demand curves intersect, the market is in
equilibrium. This is where the quantity demanded and quantity supplied
are equal. The corresponding price is the equilibrium price or market-
clearing price, the quantity is the equilibrium quantity.
 Equilibrium - Consumers and
producers react differently to price
changes. Higher prices tend to
reduce demand while encouraging
supply, and lower prices increase
demand while discouraging supply.
 Economic theory suggests that, in a
free market there will be a single
price which brings demand and
supply into balance, called
equilibrium price.
 Increase in Demand
 Remember that Supply and Demand are drawn under the ceteris
paribus assumption.
 Any factors which cause Supply and/or Demand to change will
affect equilibrium price and quantity.
 Demand will change for any of the factors discussed previously.
 An outward (rightward) shift in demand increases both
equilibrium price and quantity
 When consumers increase the quantity demanded at a given
price, it is referred to as an increase in demand.
 Increased demand can be represented on the graph as the curve
being shifted to the right. At each price point, a greater quantity
is demanded, as from the initial curve D1 to the new curve D2.
 Increase in Demand
With increase in demand this
raises the equilibrium price
and also raises the equilibrium
quantity. there has been an
increase in demand which has
caused an increase in
equilibrium quantity.
The increase in demand could
also come from changing
tastes and fashions, incomes,
price changes in  An increase in university enrollment will
complementary and substitute increase the demand for Hostel rooms,
goods, market expectations, shifting the demand curve to the right.
and number of buyers. Both the equilibrium price and the
equilibrium quantity will increase.
 Decrease in Demand
If the demand decreases, there is
a shift of the curve to the left.
If the demand starts at D1, and
decreases to D2, The equilibrium
price will decrease, and the
equilibrium quantity will also
decrease.
The quantity supplied at each
price is the same as before the
demand shift, reflecting the fact
that the supply curve has not • A report of pesticide residue on
shifted; apples decreases the demand for
but the equilibrium quantity and apples, shifting the demand curve to
the left. Both the equilibrium price
price are different as a result of and quantity will decrease.
the change (shift) in demand
 Increase in Supply
An rightward shift in supply
reduces the equilibrium price but
increases the equilibrium
quantity. When the suppliers' unit
input costs change, or when
technological progress occurs,
the supply curve shifts. This
increase in supply causes the
equilibrium price to decrease and
equilibrium quantity to increases
as consumers move along the  Technological innovation decreases
demand curve to the new lower production costs, shifting the supply
price. The price and quantity curve to the right. The equilibrium
move in opposite directions. price decreases, and the equilibrium
quantity increases.
 Decrease in Supply
If the quantity supplied
decreases, supply curve starts at
S1 and shifts leftward to S2, The
equilibrium price will increase
and the equilibrium quantity will
decrease as consumers move
along the demand curve to the
new higher price and associated
lower quantity demanded.
Supply will change for any of
the factors discussed previously. • Bad season decreases the supply of
For instance, let’s say that the coffee beans, shifting the supply
curve to the left. The equilibrium
government increase taxes on price increases, and the
CDs equilibrium quantity decreases.
 Changes in Demand and Supply
To determine the impact of both supply and demand changing:
 First examine what happens to equilibrium price and quantity
when just demand shifts.
 Second, examine what happens to equilibrium price and
quantity when just supply changes
 Finally, add the two effects together.

General Results:
 When supply and demand move in the same direction
• Equilibrium price is ambiguous
 When supply and demand move in opposite directions
• Equilibrium quantity is ambiguous
Increase in Supply and Demand
 Increase in Supply and Demand

 Both the equilibrium price  The equilibrium price will

and the equilibrium quantity decrease and the equilibrium
will increase. quantity will increase.
 Active learning Market Equilibrium
1. Using supply and demand diagrams, show the effect of the
following events on the market for sweatshirts.
a) A hurricane in South Carolina damages the cotton
crop.
b) The price of leather jackets falls.
c) All colleges require morning calisthenics in
appropriate attire.
d) New knitting machines are invented.
2. During the 2015s, technological advance reduced the cost
of computer chips. How do you think this affected the
market for computers? For computer software? For
typewriters?