Intermediate Microeconomics Ch16 notes

Intermediate Microeconomics Ch16 notes - Ch 16. Equilibrium...

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1 Ch 16. Equilibrium We have obtained the market demand curve based on consumer theory, and need to study firm theory to come up with market supply curves. But before undertaking that study, it is worthwhile to look at how the price adjusts so as to clear the market. Relationships among the price and the quantities demanded/supplied at this stage are enough to highlight important insights about equilibrium. 16.1 Market Equilibrium The individual supply curve measures how much a producer is willing to supply of a good at each possible market price. Given a number of suppliers of the good, we add up their individual supply curves to get the market supply curve . For each p , there will be S(p) units of the good to be supplied to the market, while the market demand curve D(p) represents units of the good demanded by all consumers. The market is viewed as competitive since either demanders or suppliers act independently and they take the price as given (out of any individual ’s control). It is the actions of all the market participants together that determine the price for clearing the market. That price is called the market equilibrium price where the supply of the good equals its demand. Thus, the equilibrium price p * solve the equation D(p * ) = S(p * ), as shown in figure 16.0. At equil p * , the optimal behavior of demanders and suppliers are compatible. Any price other than p * cannot be expected to persist since economic agents would have an incentive to change their behavior. If p’ < p * , suppliers realize that they can sell their good at more than p’ , more of the good will be supplied, thus pushing the price up until the excess demand vanishes at p * . If p” > p * , suppliers cannot sell their good produced at p” and have to reduce their production, thus pushing the price down until the excess supply disappears at p * . S D p” p * p’ q *
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2 16.2 Two Special Cases The first is the case of fixed supply that is independent of price ( perfectly inelastic ). The equil quantity is determined by supply conditions while the equil price is determined by demand conditions. The second is the case of a horizontal supply curve ( perfectly elastic ) where any amount of a good is supplied at a constant price. The equil price is determined by supply conditions while the equil quantity is determined by demand conditions. In both cases, the determination of price and quantity can be separated , as shown in figure 16.1; in the general case, p * and q * are jointly determined, as shown in figure 16.0. 16.3
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Intermediate Microeconomics Ch16 notes - Ch 16. Equilibrium...

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