November 15, 2015

Ch. 16. Equilibrium - Summary - Intermediate Microeconomics - Varian

16. Equilibrium

In this chapter we will describe how to use these market demand curves to determine the equilibrium market price (Refer 1.5 Market Equilibrium).

We will not study in detail, but give some examples of equilibrium analysis—how the prices adjust
so as to make the demand and supply decisions of economic agents compatible. In order to do so, we need to introduce  briefly the other side of the market—the supply side.

16.1 Supply

A. Supply curves -

Measures amount suppliers want to supply at each price

How do we derive supply curves:


Minimize costs - producing y units

Factor demand

Cost function

Firms supply when marginal cost =price

Aggregate supply fn.: S(p)

Inverse supply fun: Ps(q)

B. Demand curves

Measures amount consumers want to buy at each price

How do we derive demand curves:


Max. utility - budget restriction

Individual demand

Aggregate individuals demand function: D(p)

Inverse demand function: Pd (q)

16.2  Equilibrium

(1) Competitive market - each agent price taker

(a) Many small agents

(b) A few agents who think that the others keep fixed prices

(2) Example:

Demand: q= 5-p Supply: q = -2 + p

Inverse d.: p=5-q Inverse s.: p=2+q

16.3  Two special cases of Market Equilibrium

(1) Vertical supply

Perfectly inelastic supply


Short run supply of apartments

(2) Horizontal supply

Perfectly elastic supply


When a small country imports goods from the

world market, the country won’t influence the market

price. Supply is horizontal.

16.4 Inverse Demand and Supply Curves

16.5. Comparative statics (Refer 1.6 Comparative Statics)

(1) What happens with (q*, p*) when Supply (or Demand) changes?

Shift the Supply curve (or Demand), and get a new

(2) Example: tax per unit: t.

New supply curve: Ps + t

New equilibrium when Pd = Ps+ t

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