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ECO201_Lec 2_24 May

# ECO201_Lec 2_24 May - Lecture 4 ECO201 Section 1 General...

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Lecture 4 ECO201 Section 1

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General Market Equilibrium: In a Market products are interrelated. Every commodity has a substitute and a complement. Coke and Pepsi, Tea and Sugar etc. A demand function thus should take account of its own price as well as prices of other commodities (if not all). Same should be applied to supply function as well.
Two Commodity Market Model: Let’s assume two commodities 1 & 2 So we have- 0 1 1 = - s d Q Q 2 2 1 1 0 1 P a P a a Q d + + = 2 2 1 1 0 1 P b P b b Q s + + = 0 2 2 = - s d Q Q 2 2 1 1 0 2 P P Q d α α α + + = 2 2 1 1 0 2 P P Q s β β β + + =

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We follow the same principle as before Substitution of the demand and supply equation in the equilibrium condition we get- 0 ) ( ) ( ) ( 2 2 2 1 1 1 0 0 = - + - + - P b a P b a b a 0 ) ( ) ( ) ( 2 2 2 1 1 1 0 0 = - + - + - P P β α β α β α We have 12 parameters in two equations with two variables- prices P 1 and P 2 . We develop some short hand version or reduce the model by introducing- 2 , 1 , 0 ) ( & ) ( = - = - = i where b a C i i i i i i β α γ
We replace to the right hand side we obtain- i i C γ & 0 2 2 1 1 C P C

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ECO201_Lec 2_24 May - Lecture 4 ECO201 Section 1 General...

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