chapter16 - Intermediate Micro II Instructor Prof Berta...

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Econ 2350M Winter 2009 1 Intermediate Micro II Instructor: Prof Berta Esteve-Volart Department of Economics, York University Chapter 16 – Equilibrium Note: Only for students of Econ 2350M
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Econ 2350M Winter 2009 2 Market Equilibrium Suppose suppliers and buyers, each being price takers (competitive market): Price independent of each of them individually, but determined by all of them as a whole Equilibrium price (p at which agents do best for themselves and is consistent with what others do, therefore no incentive to do anything different) of a good is p where D=S: D(p*) = S(p*)
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Econ 2350M Winter 2009 3 Why? Remember demand function represents ‘willingness to buy’ at each p, and supply function is ‘willingness to supply’ at each p: If p>p*, e.g. p’, there are suppliers willing to sell at lower p, and of course buyers willing to buy at lower p Æ p’ cannot be an equilibrium If p<p*, e.g. p’’, there are buyers willing to buy at higher p, and of course suppliers willing to sell at higher p Æ p’’ cannot be an equilibrium
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Econ 2350M Winter 2009 4 Price Quantity D(p) S(p) P* P’ P’’
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