ch16lec - Chapter 16: Equilibrium Econ 306 Rust, Cho, Diaz...

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Chapter 16: Equilibrium Econ 306 Rust, Cho, Diaz
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Market Equilibrium •A m a r k e t i s i n e q u i l i b r i u m w h e n t o t a l quantity demanded by buyers equals total quantity supplied by sellers.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* q* D(p*) = S(p*); the market is in equilibrium.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* S(p’) When D(p’) < S(p’); an excess of quantity supplied over quantity demanded. p’ D(p’) Then, Market price must fall towards p*.
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Market Equilibrium p D(p), S(p) q=D(p) Market demand Market supply q=S(p) p* D(p”) When D(p”) > S(p”); an excess of quantity demanded over quantity supplied. p” S(p”) Then, Market price must rise towards p*.
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Market Equilibrium An example of calculating a market equilibrium when the market demand and supply curves are linear. Dp a bp () ± Sp c dp ² At the equilibrium price p*, D(p*) = S(p*). That is, ab p cd p ± ² ** which gives p ac bd * ± ² and qD p S p ad bc * . ² ²
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Market Equilibrium p D(p), S(p) D(p) = a-bp Market demand Market supply S(p) = c+dp p ac bd * ± ² d b bc ad q * ² ²
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Market Equilibrium •C a n w e c a l c u l a t e t h e m a r k e t e q u i l i b r i u m u s i n g t h e i n v e r s e market demand and supply curves? • Yes, it is the same calculation. • the equation of the inverse market demand curve. And • the equation of the inverse market supply curve. qD p ab p p a q b Dq ± ² ± ± () , 1 qS p cd p p cq d Sq ³ ² ± ³ ± , 1
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Market Equilibrium q D -1 (q), S -1 (q) D -1 (q) = (a-q)/b Market demand S -1 (q) = (-c+q)/d p* q* At equilibrium, D -1 (q*) = S -1 (q*). Market inverse supply
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Market Equilibrium pD q aq b ± ± 1 () pS q cq d ± ² ± 1 . and At the equilibrium quantity q*, D -1 (p*) = S -1 (p*). That is, b d ± ±² ** which gives q ad bc bd * ² ² and q S q ac * . ± ² ±± 11
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Market Equilibrium q D -1 (q), S -1 (q) D -1 (q) = (a-q)/b Market demand Market supply S -1 (q) = (-c+q)/d p ac bd * ± ² d b bc ad q * ² ²
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Market Equilibrium •T w o s p e c i a l c a s e s : –quant ity supp l ied is f ixed, independent of the market price, and l is extreme ly sens it ive to the market price.
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ch16lec - Chapter 16: Equilibrium Econ 306 Rust, Cho, Diaz...

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