First Year Civil Engineering Supply & Demand

Engineering Economics HS132

 Consumer’s behavior )‫ (سلوك المستهلك‬is mainly

based on psychological factors
 Variables that affect market demand:
◦ Price
◦ Consumer’s taste and preference
◦ Consumer’s income and purchasing power
◦ Prices of related items:
 E.g. when the price of power increases (electricity) the
demand for air conditioners decreases
◦ Expectation of future prices
 buy more quantities if the prices are expected to rise
◦ Number of consumers and size of market

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 As the prices increase the demand decreases

 Higher prices discourage sales
P

D (Demand)

Q
3

 A decrease in demand (from

curve D to D1) can have one
or all of the following D1 D
P
reasons:
◦ Consumer’s taste switched to a
competing product
◦ Consumer switched to a less
expensive substitute
◦ The number of possible
consumers decreased
◦ Expectation of lower prices in
the future
Q
◦ Decline of buyer’s income
decreases demand on goods

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 It is the amount of product that the producers

)‫ (المنتجين‬are willing to make available
 Factors that affects supply:
◦ Prices of raw materials:
 an increase in the prices of raw materials of a certain
product may raise price of the final product
◦ Expectation of higher future prices:
 This may cause producers to immediately increase the
supply
◦ Firms leaving the market decrease the supply
◦ Government policy such as taxes and subsidies

 Higher prices encourage greater production

P
S (Supply)

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 The point of intersection of the two curves of represents the

point of equilibrium (E)
 E represents the point where a price is agreed upon
between the consumers and the procedures “the price at
which an amount of goods is willingly supplied and
demanded (Pe)”
P D
S
P2

Pe E (Equilibrium Point)
P1
Q

 At a price less than Pe (P1) the quantity of the demand is more than the
supply; thus, a SHORTAGE happens. The consumers will derive the
price up by their willingness to pay more than P1 until Pe is reached
 At a price more than Pe (P2) the quantity of demand is less than supply;
thus, a SURPLUS will happen. The suppliers will rationally decrease
their price to sell the surplus until Pe is reached
P D S
Surplus
P2

Pe E (Equilibrium Point)
P1
Shortage Q

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 If the relationship between the supply and the demand

for a given commodity )‫ (سلعة‬is linear such that:
Quantity (1000 units) Supply Demand
(EGP) (EGP)
2 4 24
22 24 4

 It is required to determine the following:

◦ Equilibrium unit price
◦ Equilibrium quantity
◦ If the price is 18, is there a shortage or surplus? What is its
value?

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 It is the sensitivity of the quantity demanded of a

product to a change of price
 Three things can happen to the total expenditure (P *
Q) along the demand curve:
◦ Inelastic: the total expenditure falls when the price falls - the
quantity demanded (Q) is not changed by the change in
price
◦ Elastic: The increase in price causes a decrease in total
expenditure
◦ Unitary elastic: In this case a change in P causes a change
in Q but in all cases the total expenditure (P * Q) is constant

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 Most demand curves have the three types of

elasticity – depending on the price range

 Consumers are unresponsive to price changes in

one range (inelastic), while in other ranges of price a
change of price causes a significant jump in the
amount purchased

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 When the producers are responsive to price

change, the supply is elastic, while when they are
relatively unresponsive, the supply is considered
inelastic

 The two extremes of a supply curve are when it is:

◦ Inelastic, it will be a vertical line (e.g. when fishing boat
returns, it will sell at whatever prices available
◦ Elastic supply, it will be a horizontal line, where any cut in
P cause Q to be zero

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 Coefficient of demand elasticity

𝛻𝑄Τ𝑄 𝛻𝑄 𝑃
𝐸𝑑 = − =−
𝛻𝑃Τ𝑃 𝛻𝑃 𝑄
 Coefficient of supply elasticity
𝛻𝑄Τ𝑄 𝛻𝑄 𝑃
𝐸𝑠 = =
𝛻𝑃Τ𝑃 𝛻𝑃 𝑄

E > 1 → Demand (or Supply) is elastic

E < 1 → Demand (or Supply) is inelastic
E = 1 → Demand (or Supply) is unitary elastic

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First Year Civil Engineering Supply & Demand
Engineering Economics HS132

 For the following Demand Curve, calculate the

elasticity in each segment ab, bc and cd

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