Engineering Economics &

Financial Accounting

Ee&fa1April 12, 2023

Dr.K.BaranidharanPresent by…

SHIFT IN DEMAND AND SUPPLY CURVES

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Supply Curve

Quantity

Price

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

As price rises, the quantity supplied

rises.

A supply curve shows graphically how much of a good or service people are willing to sell at any given price.

Supply curve, S

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An Increase in Supply

A shift of the supply curve is a change in the quantity supplied of a good at any given price.

70 9 11 13 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1

S2

Price of coffee beans (per

pound)

Quantity

… is not the same thing as a shift of the supply curve

A movement along the supply curve…

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Movement Along the Supply Curve

A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.

70 10 11.2 12 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1S2

AC

B

Price

Quantity

… is not the same thing as a shift of the supply curve

A movement along the supply curve…

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Any “increase in supply” means a rightward shift of the supply curve: at any given price, there is an increase in the quantity supplied. (S1 S2)

Shifts of the Supply Curve

S3

S1

S2

Price

Quantity

Decrease in supply

Increase in supply

Any “decrease in supply” means a leftward shift of the supply curve: at any given price, there is a decrease in the quantity supplied. (S1 S3)

SHIFT IN DEMAND AND SUPPLY CURVES

• Change in any of the variables, other than price, that influence demand or supply will result in a shift in the demand curve or the supply curve or both.

A rise in demand(shift in the curve to the right)

• An increase in demand result in shortage of a commodity initially and existing equilibrium condition is distributed.

• Unsatisfied buyers bid up the price and producers, lured by profitability, increase the supply.

• A new equilibrium will be attained where more quantity will be exchanged at a higher price.

A fall in demand (shift in the demand curve to the left)

•A degrease in demand leads to decrease in the equilibrium price as well as the equilibrium quantity exchanged.

A rise in supply (shift in the supply curve to the right)

• An increase in supply results in a decrease in the equilibrium price and increase in the equilibrium quantity exchanged.

Changes in supply can result from events like the following: Change in production costs. Improved technology that makes production more efficient. Industry growth and shrinkage

(Economics) the economic condition in which there is neither excess demand nor excess supply in a market

A fall in supply (shift in the supply curve to the left)

• A decrease in supply result in an increase in the equilibrium price and decrease in the equilibrium quantity exchanged.

Simultaneous changes in both supply and demand

• There is decrease in the equilibrium price or an increase therein and/or a decrease in the equilibrium quantity or an increase therein depends on the extent of shift in the demand and supply curves.

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Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium quantity.

The increase in demand dominates the decrease in supply.

Quantity of coffeeQ2Q

1

P2

P1

S2

D2D

1

S1

E1

E2

(a) One possible outcome: Price Rises, Quantity Rises

Price of coffeeSmall decrease

in supply

Large increase in demand

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Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium quantity.

Q1

Q2

P2

P1

S2

D2

D1

S1

E1

E2

(b) Another Possibility Outcome: Price Rises, Quantity Falls

Price of coffee

Quantity of coffee

Large decrease in supply

Small increase in demand

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Supply, Demand and Equilibrium

Equilibrium in a competitive market: when the quantity demanded of a good equals the quantity supplied of that good.

The price at which this takes place is the equilibrium price (a.k.a. market-clearing price):

Every buyer finds a seller and vice versa.

The quantity of the good bought and sold at that price is the equilibrium quantity.

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Market equilibrium occurs at point E, where the supply curve and the demand curve intersect.

Price

Quantity

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

E EquilibriumEquilibrium price

Equilibrium quantity

Market Equilibrium

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There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

8.1 11.2

E

Surplus

Quantity demanded

Quantity supplied

Price

Quantity

Surplus

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70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

9.1 11.5

E

Shortage

Quantity demanded

Quantity supplied

Price

Quantity

There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.

Shortage

Dr.K.BaranidharanTHANK YOU