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Unformatted text preview: Section Notes 2 January 30, 2009 Solving for Equilibrium: 4 Major Cases
We have 2 functions for demand and supply, Demand is P = D(Q) and supply
is P = S (Q). Supply is also assumed to be equal to the marginal cost curve.
The following steps can be applied when solving for equilibrium using graphs
or math. You should know how to show marginal revenue and marginal outlay
on a graph. Competitive Equilibrium
1. Solve for Q∗ by setting D(Q) = S (Q). We can also think of this as marginal
(social) benet equals marginal cost.
2. Use Q∗ to nd P ∗ = D(Q∗ ) = S (Q∗ ) Monopoly
1. The monopoly sets QM by maximizing prots, or setting M R = M C ,
where M C = S (Q) and M R = ∂ (Q∂Q(Q)) .
2. Use QM to solve for PM = D(QM ) Monopsony
1. The monopsony sets QM by setting M B = M O, where M B = D(Q)
and M O = ∂ (Q∂Q Q)) . We can think of M B as marginal benets, or the
marginal benet for purchasing one more unit and M O is marginal outlay,
or the marginal increase in outlay (expenditure) for purchasing one more
2. Use QM to solve for PM = S (QM )
1. The middleman sets QM by setting M R = M O, or setting the increase
in revenue from selling one unit equal to the marginal increase in outlay
from buying one unit. From above we know that M R = M O can be
represented as ∂ (Q∂Q(Q)) = ∂ (Q∂Q Q))
2. The middleman will buy QM for PM B = S (QM ) and will sell QM for
PM S = D(QM ) Negative Externalities
Show negative externality under competitive equilbrium graphically, including
social benet, social cost, social welfare, deadweight loss
Go through Examples: (1) Standard (2) Subsidy (3) Tax (4) Tax w/Dierent
In each scenario, give class a few minutes to calculate
∆Social Benet, ∆Social Cost, ∆Social Welfare, ∆Deadweight loss, ∆Govt Revenue, ∆Producer Surplus, ∆Consumer Surplus 2 ...
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This note was uploaded on 09/24/2011 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at Berkeley.
- Spring '09