LectureLecture--22
Managerial EconomicsManagerial Economics
Lecture Delivered byLecture Delivered byProf. Muhammad AzeemProf. Muhammad Azeem
www.azmeco.blogspot.com
Assuming all other things held Assuming all other things held constant, with a decrease in the price constant, with a decrease in the price of a good, the quantity demanded will of a good, the quantity demanded will increase. increase.
Assuming all other things held Assuming all other things held constant, with an increase in the price constant, with an increase in the price of a good, the quantity demanded will of a good, the quantity demanded will decrease.decrease.
Law of Demand www.azmeco.blogspot.com
Slide-2
PP QQdd
11 121222 101033 8844 6655 44
00 44 66 88 1010 1212
55
44
33
22
11
e
cb
a
dPRICE
QUANTITY DEMANDED
D
Law of Demand www.azmeco.blogspot.com
Slide-3
4
Assuming all other things held constant, with Assuming all other things held constant, with a decrease in the price of a good, the quantity a decrease in the price of a good, the quantity supplied will decrease. supplied will decrease.
Assuming all other things held constant, with Assuming all other things held constant, with an increase in the price of a good, the an increase in the price of a good, the quantity supplied will also increase.quantity supplied will also increase.
Law of Supply www.azmeco.blogspot.com
Slide-4
5
PP QQss
11 44
22 66
33 88
44 1010
55 1212 00 44 66 88 1010 1212
55
44
33
22
11
c
ba
d
PRICE
Quantity Supplied
e
S
Law of Supply www.azmeco.blogspot.com
Slide-5
6
Market equilibriumMarket equilibrium is point where buyers and is point where buyers and seller reach the compromise and settle down the seller reach the compromise and settle down the price of the commodity. At this price quantity price of the commodity. At this price quantity demanded is equal to the quantity supplied. In demanded is equal to the quantity supplied. In diagram both curves intersect at this equilibrium diagram both curves intersect at this equilibrium level. This is a stable equilibrium.level. This is a stable equilibrium.
Market Equilibrium www.azmeco.blogspot.com
Slide-6
7
PP QQdd QQss
11 1212 4422 1010 6633 88 8844 66 101055 44 1212
Market Equilibrium www.azmeco.blogspot.com
Slide-7
8
PP QdQd QsQs
11 1212 44
22 1010 66
33 88 88
44 66 1010
55 44 121200 44 66 88 1010 1212
55
44
3322
11
ePRICE
Quantity
D
S
Market Equilibrium www.azmeco.blogspot.com
Slide-8
Point e is market equilibrium point.
9
Market Equilibrium is Stable www.azmeco.blogspot.com
Slide-9
Quantity
Price
P
Q
D S
E
S>D
D>S
Due to shortage prices are pulled down to equilibrium point, and due to surplus prices are pushed up to equilibrium level. As a result market equilibrium remains stable.
LetLet
QQdd = 14 = 14 -- 2P2PQQss = 2 + 2P= 2 + 2PD = SD = S
Mathematical Form of Market Equilibrium Model www.azmeco.blogspot.com
Slide-10
This is a simple mathematical form of market equilibrium model. Demand and supply curves are assumed to be linear. Slope of the both curves is same.
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.
Changes in Demand and Supply www.azmeco.blogspot.com
Slide-11
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.
Changes in Demand and Supply www.azmeco.blogspot.com
Slide-12
13
Quantity
Price
P0
Q0
P1
Q1
An increase in price causes a decrease in quantity demanded.
a
b
Change in Quantity Demanded-Due to price www.azmeco.blogspot.com
Slide-13
14
Quantity
Price
P0
Q0
P1
Q1
A decrease in price causes an increase in quantity demanded.
a
b
Changes in Quantity Demanded-Due to price www.azmeco.blogspot.com
Slide-14
15
Quantity
Price
P1
Q1
P0
Q0
A decrease in price causes a decrease in quantity supplied.
a
b
Changes in Quantity Supplied-Due to price www.azmeco.blogspot.com
Slide-15
16
Quantity
Price
P0
Q0
P1
Q1
An increase in price causes an increase in quantity supplied.
a
b
Changes in Quantity Supplied-Due to price www.azmeco.blogspot.com
Slide-16
17
Changes in Income of consumersChanges in Income of consumersChanges in Taste of the consumersChanges in Taste of the consumersChanges in the market size (no. of buyers)Changes in the market size (no. of buyers)Changes in the price of related goods/servicesChanges in the price of related goods/services
Shift Factors of Demand www.azmeco.blogspot.com
Slide-17
18
Quantity
Price
P0
Q0 Q1
Rise in demand shows a rightward shift in the market demand curve.
a b
Changes in Demand - Due to shift factors www.azmeco.blogspot.com
Slide-18
D0 D1
19
Quantity
Price
P0
Q1 Q0
b a
Changes in Demand - Due to shift factors www.azmeco.blogspot.com
Slide-19
Fall in demand shows a leftward shift in the market demand curve.
D1 D0
20
Changes in state of technologyChanges in state of technologyChanges in the prices of factors inputChanges in the prices of factors inputChanges in the market size (no. of sellers)Changes in the market size (no. of sellers)Changes in the Government policy (incentives)Changes in the Government policy (incentives)
Shift Factors of Supply www.azmeco.blogspot.com
Slide-20
21
Quantity
Price
P0
Q1Q0
S0 S1
a b
Changes in Supply - Due to shift factors www.azmeco.blogspot.com
Slide-21
Rise in supply shows a rightward shift in the supply curve.
22
Quantity
Price
P0
Q1 Q0
Fall in supply shows a leftward shift in the supply curve.
S0S1
b a
Changes in Supply - Due to shift factors www.azmeco.blogspot.com
Slide-22
23
Quantity
Price
P0
Q0
D0 S0
Q1
P1
Rise in demand will cause the market equilibrium price and quantity to increase.
E0
E1
D1
Effects of Changes in Demand on Market Equilibrium Point www.azmeco.blogspot.com
Slide-23
24
Quantity
Price
P1
Q1
S0
Q0
P0
D0
Fall in demand will cause the market equilibrium price and quantity to decrease.
E0
E1
Effects of Changes in Demand on Market Equilibrium Point www.azmeco.blogspot.com
Slide-24
25
Quantity
Price
P0
Q0
D0 S0
Q1
P1
Rise in supply will cause the market equilibrium price to decrease and quantity to increase.
E0
E1
Effects of Changes in Supply on Market Equilibrium Point www.azmeco.blogspot.com
Slide-25
26
Quantity
Price
P1
Q1
D0
Q0
P0
Fall in supply will cause the market equilibrium price to increase and quantity to decrease.
S0
E1
E0
S1
Effects of Changes in Supply on Market Equilibrium Point www.azmeco.blogspot.com
Slide-26
27
D
DDDS S S
S S S
S S S
Effects of Simultaneous Changes in Demand and Supply www.azmeco.blogspot.com
Slide-27
28
D
DDDS S S
S S S
S S S
SS
= DD
S D
SS
=
S
DDD
= DDD
SSS
SDD
= DSS
1 2 3
4
5
678
91011
121314
151617
Effects of Simultaneous Changes in Demand and Supply www.azmeco.blogspot.com
Slide-28
29
Quantity
Price
D0 S0
1
P0 = 3
Q0 = 8
E
No Change in Demand and Supply www.azmeco.blogspot.com
Slide-29
30
Quantity
Price
P0 = 3
Q0 = 8
D0
Q1 = 10
P1 = 2
S1
E1
E0
S02
No Change in Demand and Rise in Supply www.azmeco.blogspot.com
Slide-30
31
Quantity
Price
P1 = 4
Q1 = 6
D0
Q0 = 8
P0 = 3
S0
E0
E1
S13
No Change in Demand and Fall in Supply www.azmeco.blogspot.com
Slide-31
32
Quantity
Price
P1 = 4
Q1 = 10
D0
Q0 = 8
P0 = 3
S0
D1
E0
E1
4
No Change in Supply and Rise in Demand www.azmeco.blogspot.com
Slide-32
33
Quantity
Price
P0 = 3
Q0 = 8
D1
Q1 = 6
P1 = 2
S0
D0
E1
E0
5
No Change in Supply and Fall in Demand www.azmeco.blogspot.com
Slide-33
34
Quantity
Price
D0
Q1 = 12
P0 = 3
S1D1
E0 E1
S0
Q0 = 8
6
Rise in Demand Is Equal to Rise In Supply www.azmeco.blogspot.com
Slide-34
35
Quantity
Price
D0
Q1 = 14
P0 = 3
S1D1
E0E1
S0
Q0 = 8
P1 = 2
7
Rise in Demand Is Less Than Rise In Supply www.azmeco.blogspot.com
Slide-35
36
Quantity
Price
D0
Q1 = 14
P0 = 3
S1D1
E0
E1
S0
Q0 = 8
P1 = 4
8
Rise in Demand Is More Than Rise In Supply www.azmeco.blogspot.com
Slide-36
37
Quantity
Price
D0
P0 = 3
S1D1
E0
E1
S0
Q0 = 8
P1 = 59
Rise in Demand Is Equal To Fall In Supply www.azmeco.blogspot.com
Slide-37
38
Quantity
Price
D0
Q0 = 8
P1 = 5
S1D1
E0
E1
S0
Q1 = 6
10
P0 = 3
Rise in Demand Is Less Than Fall In Supply www.azmeco.blogspot.com
Slide-38
39
Quantity
Price
D0
Q1 = 10
P0 = 3
S0D1
E0
E1
S1
Q0 = 8
P1 = 511
Rise In Demand Is More Than Fall In Supply www.azmeco.blogspot.com
Slide-39
40
Quantity
Price
D1
P1 = 2
S1D0
E1
E0
S0
Q0 = 8
P0 = 3
12
Fall In Demand Is Equal to Rise In Supply www.azmeco.blogspot.com
Slide-40
41
Quantity
Price
D1
Q1 = 10
P0 = 3
S1D0
E0
E1
S0
Q0 = 8
P1 = 1
13
Fall In Demand Is Less Than Rise In Supply www.azmeco.blogspot.com
Slide-41
42
Quantity
Price
D1
P0 = 3
S1D0
E0
E1
S0
Q0 = 8
P1 = 1
14
Q1 = 6
Fall In Demand Is More Than Rise In Supply www.azmeco.blogspot.com
Slide-42
43
Quantity
Price
D1
Q0 = 8
P0 = 3
S0D0
E1 E0
S1
Q1 = 4
15
Fall In Demand Is Equal To Fall In Supply www.azmeco.blogspot.com
Slide-43
44
Quantity
Price
D1
Q1 = 4
P0 = 3
S0
D0
E1E0
S1
Q0 = 8
16P1 = 4
Fall In Demand Is Less Than Fall In Supply www.azmeco.blogspot.com
Slide-44
45
Quantity
Price
D1
Q0 = 8
P0 = 3
S0D0
E1
E0
S1
Q1 = 4
17
P1 = 2
Fall In Demand Is More Than Fall In Supply www.azmeco.blogspot.com
Slide-45
46
Quantity
Price
P1
S0
D
E0
E1
S1
Q
P0
S2
E2P2
Perfectly Inelastic Demand
Curve
1
Perfectly Inelastic Demand Curve And Changes In Supply www.azmeco.blogspot.com
Slide-46
47
Quantity
Price
P1
D0
S
E0
E1
D1
Q
P0
D2
E2P2
Perfectly Inelastic SupplyCurve
2
Perfectly Inelastic Supply Curve And Changes In Demand www.azmeco.blogspot.com
Slide-47
48Quantity
Price
S0
E0 E2
S1
Q0
S2
E1P
Perfectly Elastic
Demand Curve
3
Q1 Q2
D
Perfectly Elastic Demand Curve And Changes In Supply www.azmeco.blogspot.com
Slide-48
49Quantity
Price
P1
D0
SE0E1
D1
Q1
P0D2
E2P2
Perfectly ElasticSupplyCurve
4
Q0 Q2
Perfectly Elastic Supply Curve And Changes In Demand www.azmeco.blogspot.com
Slide-49