Econ 4010 Lecture 21

Econ 4010 Lecture 21 - <Lecture 21> 9. The Analysis...

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<Lecture 21> 9. The Analysis of Competitive Markets Supply and Demand (p.23) Equilibrium The Demand curve and the Supply curve intersect at the equilibrium, or market-clearing price and quantity. The market mechanism is the tendency in a free market for the price to change until the market clears – i.e., until the quantity supplied and the quantity demanded are equal. At this point, because there is neither excess demand nor excess supply, there is no pressure for the price to change further. Competitive Market The above situation makes sense only if a market is at least roughly competitive. By this we mean that both sellers and buyers should have little market power – i.e., little ability individually to affect the market price. The model of perfect competition rests on three basic assumptions. i) Price Taking Because many firms compete in the market and each individual firm sells a sufficiently small proportion of total market output, its decisions have no impact on market price. Thus, each firm takes the market price as given. In short, firms in perfectly competitive markets are price takers. ii) Product Homogeneity When the products of all of the firms in a market are perfectly substitutable with one another – that is, when
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Econ 4010 Lecture 21 - &lt;Lecture 21&gt; 9. The Analysis...

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