# ch12 - Chapter 12 The Partial Equilibrium Competitive Model...

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Chapter 12 The Partial Equilibrium Competitive Model

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Market Demand Assume that there are only two goods ( x and y ) An individual’s demand for x is = = n i i y x i p p x X 1 ) , , ( for demand Market I
Market Demand x x x p x p x p x x 1 * x 2 * p x * X Individual 1’s demand curve Individual 2’s demand curve Market demand curve X * X x 1 * + x 2 * = X *

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Shifts in the Market Demand Curve The market demand summarizes the ceteris paribus relationship between X and p x – changes in p x result in movements along the curve (change in quantity demanded ) changes in other determinants of the demand for X cause the demand curve to shift to a new position (change in demand )
Shifts in Market Demand x = 10 – 2 p + 0.1 I + 0.5 p x = 17 – p + 0.05 I + 0.5 p The market demand curve is ( p y = 4, I 1 = 40, I 2 = 20)

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Generalizations • There are n goods ( x i ) with prices p i , i = 1,…, n and m individuals in the economy The j th’s demand for the i th good depends on all prices and on I j : x = x ( p ,…, p , I ) • The market demand function for x i is the sum of each individual’s demand for that good ) , ,..., ( 1 1 j n m j ij i p p x X I = = The market demand function depends on all p i and I j
Elasticity of Market Demand The price elasticity of market demand D D P Q Q P P P P Q e = ) , ' , ( , I • Demand is elastic if e Q,P <-1 & inelastic if 0> e Q , P >-1 The cross-price elasticity of market demand , ' ( , ', ) ' ' D Q P D Q P P P e P Q = I The income elasticity of market demand D D Q Q P P Q e I I I I = ) , ' , ( ,

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Timing of the Supply Response In the analysis of competitive pricing, the time period under consideration is important very short run no supply response (quantity supplied is fixed) short run existing firms can alter their quantity supplied, but no new firms can enter the industry long run new firms may enter an industry
Pricing in the Very Short Run Quantity Price S D Q* P 1 D P 2 If quantity is fixed in the very short run, price will rise 1 2 In the very short run (or the market period ), there is no supply response to changing market conditions

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Short-Run Price Determination The number of firms in an industry is fixed They can adjust the quantity they produce by altering the levels of the variable inputs they use A perfectly competitive industry obeys: there are a large number of firms, each producing the same homogeneous product each firm attempts to maximize profits each firm is a price taker its actions have no effect on the market price information is perfect transactions are costless
Short-Run Market Supply The quantity of output supplied to the entire market in the short run is the sum of the quantities supplied by each firm the amount supplied by each firm depends on price The short-run market supply curve will be upward-sloping because each firm’s short-run supply curve has a positive slope

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## This note was uploaded on 11/06/2009 for the course ECON ECON111 taught by Professor Smith during the Spring '09 term at Punjab Engineering College.

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ch12 - Chapter 12 The Partial Equilibrium Competitive Model...

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