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Unformatted text preview: 2.3 Market Equilibrium • Unless the price is set so that consumers want to buy exactly the same amount that suppliers want to sell, either some buyers cannot buy as much as they want or some sellers cannot sell as much as they want • When all traders are able to buy or sell as much as they want, we say the market is in equilibrium : a situation in which no participant wants to change its behavior Set supply and demand functions equal to find equilibrium: Q d =Q s =Q Forces that drive the market to equilibrium • Indirect evidence that a market is in equilibrium is that you can buy as much as you want of a good at the market price o Invisible hand : unseen market force that directs people to coordinate their activities to achieve a market equilibrium • If the price is not at equilibrium level , consumers or firms have an incentive to change their behavior in a way that will drive the price to equilibrium level • p<p*: excess demand: the amount by which the quantity demanded exceeds the quantity supplied at the specific price o not enough of the supply, some consumers will offer to pay more, upward pressure on price continues until it reaches equilibrium • p>p*:excess supply: the amount by which quantity supplied is greater than the quantity demanded at a specific price o downward pressure on price until equilibrium reached • Market equilibrium price is also called the market clearing price because it removes from the market all frustrated buyers and sellers 2.4 Comparative Statistics • Equilibrium changes if a shock occurs such that one of the variables we were holding constant changes, causing a shift in either the demand or supply curve Comparative Statistics...
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This note was uploaded on 04/02/2008 for the course ECON 401 taught by Professor Kuhn during the Spring '08 term at University of Michigan.
- Spring '08
- Market Equilibrium