KW_Macro_Ch_03_Sec_03_Supply_Demand_and_Equilibrium

KW_Macro_Ch_03_Sec_03_Supply_Demand_and_Equilibrium -...

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>> Supply and Demand Section 3: Supply, Demand, and Equilibrium chapter 3 We have now covered the first three key elements in the supply and demand model: the supply curve, the demand curve, and the set of factors that shift each curve. The next step is to put these elements together to show how they can be used to predict the actual price at which a good will be bought and sold. What determines the price at which a good is bought and sold? We have already learned the general principle that markets move toward equilibrium , a situation in which no individual would be better off taking a different action. In the case of a competitive market, we can be more specific: a competitive market is in equilibrium when the price has moved to a level at which the quantity demanded of a good equals the quantity supplied of that good. At that price, no individual seller could make her- self better off by offering to sell either more or less of the good and no individual buyer could make himself better off by offering to buy more or less of the good. The price that matches the quantity supplied and the quantity demanded is the equilibrium price; the quantity bought and sold at that price is the equilibrium quantity. A competitive market is in equilibrium when price has moved to a level at which the quantity demanded of a good equals the quantity supplied of that good. The price at which this takes place is the equilibrium price , also referred to as the market- clearing price . The quantity of the good bought and sold at that price is the equi- librium quantity .
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The equilibrium price is also known as the market-clearing price : it is the price that “clears the market” by ensuring that every buyer finds a seller, and vice versa. You may notice from this point on that we will no longer focus on middlemen such as scalpers but focus directly on the market price and quantity. Why? Because the function of a middleman is to bring buyers and sellers together to trade. But what makes buyers and sellers willing to trade is in reality not the middleman, but the price they agree upon—the equilibrium price. By going deeper and examining how price functions within a market, we can safely assume that the middlemen are doing their job and leave them in the background. So, how do we find the equilibrium price and quantity? Finding the Equilibrium Price and Quantity The easiest way to determine the equilibrium price and quantity in a market is by putting the supply curve and the demand curve on the same diagram. Since the supply curve shows the quantity supplied at any given price and the demand curve shows the quantity demanded at any given price, the price at which the two curves cross is the equilibrium price: the price at which quantity supplied equals quanti- ty demanded. Figure 3-9 combines the demand curve from Figure 3-1 in “The Demand Curve”
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This note was uploaded on 04/10/2008 for the course ECONOMICS 103 taught by Professor Sheflin during the Spring '08 term at Rutgers.

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KW_Macro_Ch_03_Sec_03_Supply_Demand_and_Equilibrium -...

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