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Unformatted text preview: Microeconomics I - Lecture #6, March 24, 2009 6 Market equilibrium, Algebraic solution, Changes of equilibrium Demand curve/function- for each price p we determine how much of a good will be demanded D ( p ). Supply curve/function- for each price p we determine how much of a good will be supplied S ( p ). Given individual demand curves we can add them up to get a market demand curve. Similarly, if we have a number of independent supply curves to get the market supply curve. Individual demanders and suppliers are assumed to take prices as given (feature of a competitive market). The equilibrium price of a good is that price where the supply of the good equals the demand, i.e. the price where the demand and supply curves cross. If p < p * the demand is greater than the supply. Then some product could be sold for higher price and hence the price is pushed up. If, on the other hand, p > p * demand is less than supply and some supplier will not sell what they would like to unless they lower the price. The equilibrium price and quantity is, in general, determined by both supply and demand. There are two special cases: 1. Vertical supply curve (perfectly inelastic supply). The amount supplied is fixed and indepen- dent of price. In this case the equilibrium quantity is determined entirely by the supply and the equilibrium price is determined entirely by demand conditions. When supply is perfectly inelastic, a shift in the demand curve has no effect on the equilibrium quantity supplied onto the market. Examples include the supply of tickets for sports or musical venues, and the short run supply of agricultural products (where the yield is fixed at harvest time) the elasticity of supply = zero when the supply curve is vertical. 2. Horizontal supply curve (perfectly elastic supply). The industry will supply any amount of a good at a constant price. In this case the equilibrium price is determined entirely by the supply and the equilibrium quantity is determined entirely by demand curve. When supply is perfectly elastic a firm can supply any amount at the same price. This occurs when theis perfectly elastic a firm can supply any amount at the same price....
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This note was uploaded on 09/21/2011 for the course ECON 1023 taught by Professor Mark during the Spring '11 term at UC Irvine.
- Spring '11
- Market Equilibrium