9Lecture - LECTURE 9 MARKET EQUILIBRIUM We have now...

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LECTURE 9 MARKET EQUILIBRIUM We have now completed construction of one of the most powerful engines of science in the history of the world: supply and demand analysis. Supply and demand analysis can be used to analyze any market, any time, anywhere, in any kind of economy; free-market, command, or mixed. 1 In every market, suppliers of the economic good exchanged in the market enter the market with something to sell. Demanders enter the market wanting to buy. Transactions occur. Trade occurs. If the market is efficient, and there is no outside interference in the market, then the market will clear (at the equilibrium price, demanders will leave with the amount of the good that they wanted, given the price they had to pay, and suppliers will leave having supplied the amount of the good that they wanted to supply, given the price they had to settle for). 2 If there is interference in the market, say, by government price ceilings or price floors, or the imposition of quotas, or subsidies, then the market will achieve an equilibrium that may be different from the equilibrium that would have been achieved in the absence of the interference. In the following discussion, we shall assume there is no interference in the market from the outside, and the market is allowed to achieve equilibrium at the intersection of the supply and demand curves. In each of the eight graphs below, the market starts out with the supply and demand curves that we assume characterize the Tempe pizza market in equilibrium, which equilibrium is represented by Figure 8-4. You should review Figure 8-4 before you go any further. Note our price of pizza of $10 1 When John F. Kennedy became the U.S. President in January of1961, the Pentagon was in pretty bad shape. Kennedy’s predecessor, Dwight Eisenhower, was a five-star general during World War II, led Operation Overlord, the invasion of Europe on June 6, 1944, and returned home a hero. He ran for President as a Republican, and served two four-year terms. In his farewell speech as President, he warned society of the growing “military-industrial complex” that he feared would become all-powerful. The Pentagon was really inefficient. Kennedy surrounded himself with some smart Cabinet members that were charged with straightening out the Pentagon. They had the nickname “The Whiz-kids”. They were led by Robert S. McNamara who was Secretary of Defense under both Kennedy and Lyndon Johnson, and he was an economics major at Berkeley, with an M.B.A. from Harvard. (He passed away on July 5, 2009, at the age of 93.) One of my professors was invited to take a tour of the Pentagon that had been reorganized, restructured, and that had become highly efficient. When he saw what McNamara had put into place, my professor said, “Why, you only used principles of economics to guide the reorganization of the Pentagon. Why did you need so many Ph.D.’s in economics to carry out your plan?”
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This note was uploaded on 03/23/2011 for the course ECN 212 taught by Professor Nancy during the Spring '07 term at ASU.

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9Lecture - LECTURE 9 MARKET EQUILIBRIUM We have now...

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