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:
Technology
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:
Preferences
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
Example:
Short run supply of apartments
(2) Horizontal supply
Perfectly elastic supply
Example:
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
equilibrium.
(2) Example: tax per unit: t.
New supply curve: Ps + t
New equilibrium when Pd = Ps+ t
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